August 2019

Banking Barometer 2019 Economic trends in the Swiss banking industry  Content

Executive Summary 4

I. The Swiss banking sector 14 I. 1 Economic policy environment 16 I. 2 Structural change and growth areas 20 I. 3 Regulation 27 I. 4 Tax and Compliance 32

II. Consolidated trend in Switzerland’s banks 40 II. 1 Bank net income 40 II. 1.1 Trends in 2018 41 II. 1.2 Trends in the current year 47 II. 2 Balance sheet business 48 II. 2.1 Trends in 2018 48 II. 2.2 Trends in 2019 58 II. 3 Assets under management 60 II. 3.1 Trends in 2018 60 II. 3.2 Trends in 2019 65 II. 4 Employment at Switzerland’s banks 66 II. 4.1 Trends in 2018 66 II. 4.2 Trends in 2019 69

III. Developments in selected areas of business 74 III. 1 Overview of assets and investments under management 75 III. 2 Swiss wealth management 79 III. 2.1 New regulations require the adaptation of business models 82 III. 2.2 Role and relevance of wealth management in Switzerland 84 III. 2.3 Competition between wealth management centres 86 III. 2.4 The financial centre is attractive and complies with the rules 91 III. 2.5 Income remains stable, margin declines 93 III. 2.6 A highly innovative financial ecosystem 96 III. 2.7 Employment, talent pool and certification in wealth management 98 III. 2.8 Conclusion und outlook: securing a leadership position 102 III. 3 Switzerland – a strong investment management hub 106

List of sources 118

2 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 3 Executive Summary

Executive Summary Part I: Economic policy environment remains challenging Negative interest rates and international resistance The banking sector makes a significant contribution Last year, negative interest rates once again characterised the monetary policy to the success of the Swiss financial centre. Switzerland environment. At the end of 2018, sight deposits totalling CHF 269 bn were subject to negative interest rates in Switzerland. At the same time, non-banks such as is one of the leading global financial centres and contin- pension funds substantially increased their mortgage lending in their search for ues to be the top location for cross-border wealth returns. Both factors had a dampening effect on interest rate margins. Unlike in the management. At the end of 2018 there were 248 banks past, banks can now only counteract this trend to a limited extent by expanding volumes: a trend towards saturation and stricter requirements are in particular in Switzerland. limiting growth in the mortgage lending segment.

Uncertainties regarding market access are still a topic Compared with the previous year, the framework conditions for Swiss banks’ cross-border business have deteriorated. The wide-reaching lack of market access for institutions operating out of Switzerland at present represents a challenge for Swiss banks active in the field of wealth management. Practical solutions governing market access have been requested by the banking industry, among other things during discussions about a framework agreement with the EU. Now that Switzer- land has equivalent regulations to the EU in technical and transparency terms, there are no longer any legitimate reasons to exclude Switzerland from the European single market. An example of this is the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA), which among other things modernise investor protection. Further amendments in the areas of money laundering and data protec- tion as well as the banks’ code of conduct with regard to the exercise of the due The economic environment in which the banks operate in Switzerland continues diligence make an important contribution to this. In September 2018, Switzerland to be challenging: rising regulatory costs, persistent negative interest rates and for the first time exchanged data with 36 partner states under the Automatic restrictions to market access are impacting the framework conditions for these Information Exchange (AEOI). An extension to an additional 37 nations is currently institutions. In light of the continuing decline in margins and the ongoing digitalisa- underway. The European Commission’s decision not to extend Switzerland’s stock tion of the financial sector, it is likely that the structural realignment in the banking market equivalence is one example that shows the difficult nature of the corre- sector will continue in the coming years. Despite the uncertain environment, the sponding negotiations, which are not void of political interests. adjustment process and the economic challenges, the banks are developing solidly.

4 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 5 Executive Summary

Disadvantages for the capital market through stamp duties and Part II: Solid business performance withholding tax Stamp duties and withholding tax are two internationally unique and «homemade» Profit increase despite growing burden of negative interest rates competitive disadvantages for the Swiss financial centre. The capital market is The aggregate operating net income of the banks in Switzerland increased by 4.6 particularly impacted by this fact, as they curb issuing and trading activities in Swit- percent year-on-year to CHF 65.3 bn. The most important driver here was the big zerland. In June, the Federal Council published the parameters for a planned reform banks (+8.5 percent). In 2018, 216 institutions reported a total profit of CHF 12.8 bn, of the withholding tax and aims to send a draft for consultation in autumn 2019. while 32 reported a total loss of CHF 1.3 bn. The resulting annual profit for the overall banking sector amounted to CHF 11.5 bn and was therefore CHF 1.7 bn Global framework conditions for new digital solutions higher than in the previous year. Gross profit from the business operations of the New digital technologies give rise to seminal business opportunities and increase the banks in Switzerland increased by 20.3 percent in 2018. The banks paid a total of financial centre’s competitiveness. Of note here is that the banks and fintech compa- CHF 1.5 bn in income taxes and taxes on earnings. nies often work together in this area and leverage potential synergies. At the same time, however, this also intensifies the competition and margin pressure on tradi- Net income from the interest-earning business declined slightly, which is due to the tional business activities. Digital technologies are particularly also leading to a shift in negative interest rates, among other factors. In 2018, the banks in Switzerland paid job profiles in the banking sector – towards IT, credit and risk management, research negative interest rates amounting to approx. CHF 2.0 bn. Net income from the and product development. commission and services business rose only slightly year-on-year and remained on par with the previous year’s level. As in previous years, Zurich and Geneva took second and third place in the IFZ FinTech Hub ranking. At the end of 2018, there were 365 fintech companies in Despite the decline, net income from the interest-earning business made the largest Switzerland, 136 of which were launched in the last year alone. The choice of contribution to aggregate operating net income. Net income from the commission Geneva as the location for Libra – a cryptocurrency initiated by a consortium led by and services business was the second-largest contributor to total net income. Com- Facebook – underscores Switzerland’s international competitiveness in attracting pared with the previous year, the income items and commission expenses rose only fintech companies. The framework conditions for digital innovations are being slightly and are at a similar level to last year. Net income from the trading business continuously improved. For example, at the beginning of 2019, the «Fintech rose by 5.9 percent in 2018. Geopolitical uncertainties and market volatility have licence» was introduced, which features leaner requirements than for obtaining a increased, which resulted in higher trading activity. Other ordinary net income rose bank licence. Further to this, the SBA together with member institutions, auditing by CHF 2.6 bn, which is mainly attributable to dividend income at the big banks firms and providers, developed guidelines that provide a solid foundation for the from subsidiaries. proper use of cloud banking. Higher mortgage holdings, lower trading portfolio assets The aggregate balance sheet total of all the banks in Switzerland fell by 0.8 percent to CHF 3,225.0 bn in 2018. Mortgage loans increased by 3.7 percent and were the largest asset item with a share of balance sheet of roughly one-third. At the same time, customer loans abroad and loans to foreign central banks declined. The 11.2 percent reduction in the item portfolios of securities and precious metals can pri- marily be explained by the negative developments in stock markets.

6 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 7 Executive Summary

Lending by banks intact On the liabilities side, amounts due in respect of customer deposits rose by 2.2 The banks’ lending business is an important pillar for economic development in percent. Liabilities from trading portfolios increased significantly by 36.3 percent. Switzerland. Compared with the previous year, the total domestic credit volume The item trading portfolio liabilities comprises short positions related to the trading rose 3.9 percent to CHF 1,174.7 bn in 2018. Of that total, CHF 164.6 bn originated business. This is an indication that investors expect to see declining stock market from secured and unsecured customer loans and CHF 1,010.2 bn was attributable prices. Liabilities from securities financing transactions and the items bond issues, to mortgage loans. Growth in domestic mortgage lending was therefore higher central mortgage institution loans and cash bonds, liabilities to other banks and than in the previous year (2017: +2.1 percent). The volume of corporate loans equity capital have also risen. increased by 6.6 percent to CHF 530.8 bn. Of this, 83.2 percent is attributable to SME with fewer than 250 employees. Fewer employees due to restructuring At the end of 2018, the banks in Switzerland employed a total of 90,660 persons Despite negative interest higher customer deposits (in full-time equivalents, in Switzerland) and therefore 1.3 percent fewer than in the On the liabilities side, liabilities in the form of customer deposits recorded a rise of previous year. The greatest job cuts were reported by the foreign banks (-5.8 per- 1.5 percent and at 56.3 percent, accounted for the largest share of liabilities. Sight cent) and the big banks (-3.3 percent). Part of the decline can be explained by the deposits and other amounts due in respect of customer deposits decreased by 1.1 fact that jobs were transferred to intragroup legal entities that are not covered by percent and 0.4 percent. Time deposits, in contrast, rose by 17.0 percent. Short banking statistics. The payroll expenditure fell above-average by 7.0 percent. At the positions to hedge price risks, which saw strong gains due to weak stock markets, end of 2018, the unemployment rate was 2.3 percent. The number of job-seekers contributed to this. Equity capital increased by 0.8 percent. Liabilities to banks fell decreased significantly. The labour market in the banking sector therefore continues by 2.7 percent in 2018. Trading portfolio liabilities declined by 3.1 percent, which is to be robust. attributable to short positions and market contractions. The balance sheet item «bond issues, central mortgage institution loans and cash bonds» even fell by 6.9 According to a survey conducted by the SBA, the employment trend in the first percent in the past year. half of 2019 increased slightly. Around 60 percent of the banks surveyed expect the employment trend to be flat for the second half of 2019. The balance sheet totals rising since the beginning of 2019 In the first five months of 2019, the aggregate balance sheet total of the banks in Switzerland increased by 2.8 percent. The most important driver here was amounts due from securities financing transactions (+14.7 percent) and trading portfolio assets (+6.2 percent). Customer loans, mortgage loans, loans to other banks and financial investments all increased.

8 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 9 Executive Summary

Part III: Wealth management and investment management as an important export Rise in assets under management in Western Europe thanks to investment sectors of the Swiss financial centre performance A considerable outflow of cross-border assets was expected, in particular due to Banks in Switzerland had a total of CHF 6.9 tn of assets under management at the the introduction of the Automatic Exchange of Information and the associated end of 2018, which is 4.8 percent less than in the previous year, and is mainly due disclosure of customer assets. Now that the majority of the new regulations have to market developments. These assets are broken down into CHF 1.4 tn of domestic come into force and the first customer data have been supplied to foreign tax private assets, CHF 2.3 tn of private assets in cross-border customer relationships and authorities, it can be said by the end of 2018 that the outflow has remained within CHF 3.3 tn of assets originating from companies and institutional clients. reasonable limits in recent years: Western European private customers transferred a net total of CHF 95 bn out of Switzerland between 2013 and 2018, which corre- Leading global position in cross-border wealth management sponds to around 10 percent of the assets of this customer segment in 2013. At Wealth management – i.e. the management of private assets – is the Swiss financial the same time, this segment benefited from a rise in assets of CHF 115 bn resulting centre’s leading area of expertise. It encompasses the provision of comprehensive from investment performance. This more than offset the net outflows, which financial services for private individuals and their assets. In 2018, banks in Switzer­ resulted in an increase in the assets under management for Western European land managed a total of CHF 3.7 tn of private assets, of which around 62 percent customers. Income for each franc managed has, however, decreased – both in the originated from customers domiciled abroad. Even in an environment characterised domestic business as well as for cross-border customer relationships – and is now by stricter regulatory framework conditions to ensure tax transparency, Switzerland at an internationally comparable level. remains the international leader in global cross-border wealth management with a share of around 27 percent of the market. Quality of advice is Swiss wealth management’s trump card The volume of assets under management increased by CHF 300 bn between 2013 Swiss wealth management displays a high level of global diversification in terms of and 2018. This is a clear indicator that the Swiss wealth management offering is customer domiciles: the global importance of the Swiss banking centre is illustrated intact and continues to be very popular with customers abroad. Even in a market by the fact that four regions of the world each account for more than 10 percent with tax transparency, the majority of customers served by the Swiss wealth man- of assets under management. Western Europe is by far the most important market agement industry want to benefit from the advantages offered by Switzerland and for Swiss wealth management, accounting for 42 percent of assets under manage- the high-quality advice of its financial institutions. With their broad range of ser- ment, followed by the Middle East, Latin America and Asia. Switzerland does vices, the banks in Switzerland have all the necessary strengths to prosper in a not border on the key wealth management growth markets and therefore gains competitive environment in which advisory quality is more of a determining factor less benefit than other financial centres from the automatic advantages that exist than pricing or national regulations. for neighbouring countries. In recent years, assets under management have experienced significantly more growth in particular in Singapore and Hong Kong. Investment management as an important export sector for Switzerland In recent years, investment management, or the professional management of assets for institutional and private customers, has established itself as the central pillar of Switzerland’s finance industry and as part of its value proposition. In 2018, invest- ments totalling CHF 3.3 tn were managed in Switzerland. This corresponds to about five times Switzerland’s gross domestic product. 34 percent thereof are managed for customers abroad. Investment management generates significant added value

10 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 11  Executive Summary

for the financial sector and real economy through the efficient allocation of capital and by ensuring efficient markets and the professional management of institutional and non-institutional assets. As a service provider for other banking segments, it is closely connected to wealth management and contributes to the comprehensive offering available to domestic and foreign customers in the Swiss financial centre.

Fig. 1

Key data banking sector

2017 2018 Change YoY

Number of institutions 253 248 5

Number of employees (in full-time equivalents, in Switzerland) 91,900 90,660 -1.3 %

in CHF bn

Aggregated net income 62.5 65.3 4.6 %

Interest rate business 24.0 23.5 -1.8 %

Net income from the commission and services business 21.7 22.0 1.2 %

Net income from trading 7.7 8.2 5.9 %

Other ordinary income 9.0 11.6 28.6 %

Gross profit from business operations 18.5 22.2 20.3 %

Income taxes and taxes on earnings paid 2.2 1.5 -34.9 %

Aggregate annual profits (result for the period) 9.8 11.5 17.3 %

Annual profit 10.3 12.8 24.3 %

Annual loss 0.5 1.3 160.0 %

Balance sheet total 3,249.4 3,225.0 -0.8 %

Lending volume 1,131.1 1,174.7 3.9 %

Assets under management in Switzerland 7,291.8 6,943.5 -4.8 %

Assets under management cross-border for private customers 2,276.2 2,277.9 0.1 %

Assets under management in investment management 3,386.0 3,344.2 -1.2 %

Institutional investors (discretionary mandates and collective 2,208 2,161 -2.1 % investment schemes)

Private investors (discretionary mandates, advisory mandates for 1,178 1,183 0.4 % institutional investors

Source: SNB, SBA, IFZ / AMP and BCG

12 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 13 I The Swiss banking sector

As at the end of 2018, there were 248 banks operating in Switzerland. The total I. The Swiss banking sector number decreased slightly by five. The reduction is related to the regional banks and savings banks, the foreign banks and the private bankers. The banking sector makes a significant contribution to the success of the Swiss financial centre. The Swiss finan- The Swiss National Bank (SNB) classifies the banks in Switzerland into eight groups: cantonal banks, big banks, regional banks and savings banks, Raiffeisen banks, cial centre is one of the most competitive in the world foreign banks, private bankers, stock exchange banks 3 and «other banking and remains the global leader in the cross-border wealth institutions». management business. The broad range of specialised Fig. 2 investment management services it offers caters to the The structure of the Swiss banking sector as at end of 2018 strong demand for investment solutions. Switzerland No. of institu-­ No. of institu- New Reallo­ is also a leading location for innovation sector: the frame- tions 2017 tions 2018 admissions cations Omissions work conditions for global innovation are world-class.1 Cantonal banks 24 24 Big banks 4 4

Regional banks and savings banks 62 60 2

Raiffeisen banks 1 1

Foreign banks 99 97 +1 / -1 2

Private bankers 6 5 1

Stock exchange banks 43 43 1 +1 / -1 1

Other banking institutions 14 14

Total 253 248 1 6

Source: SNB

The Swiss banking sector is characterised by a large variety of banking institutions with differing business models. It provides a broad spectrum of comprehensive, high quality services. Digital services in particular are playing an increasingly impor- tant role due to the structural changes in the industry and new competitors. In a challenging economic environment, the banking sector made an important contri- bution to value creation in Switzerland in 2018, accounting around for around five percent thereof.2

1 Institute of Financial Services Zug (2019). FinTech Study 2019 – An Overview of Swiss FinTech. 2 State Secretariat for Economic Affairs (2019). Quarterly data on gross domestic product according 3 The stock exchange banks operate primarily in the wealth management business and are represented by to production rate.. the Association of Swiss Asset and Wealth Management Banks.

14 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 15 I The Swiss banking sector

I. 1 Economic policy environment Switzerland.4 In 2018, negative interest rates once again had a dampening effect on interest rate margins industry-wide. In the past, the banks were able to compensate Low interest rates for the margin pressure by expanding credit volumes and reducing deposit interest On 31 July 2019, the Federal Reserve (Fed) reduced the target range for the federal to zero. The mortgage market, however, is showing first signs of saturation. A funds rate. Politically, the focus is currently mainly on the effects of the trade dis- similar expansion in volume is unlikely to be possible in the future. The lower profits pute with China on the US economy. In Europe, while the European Central Bank that would result would hinder capital accumulation and the banks’ ability to (ECB) ended its government bond buying programme at the end of 2018, however, innovate. Passing negative interest rates on to clients is now being categorically in March 2019 it announced that starting in September, a programme would be ruled out by only around 30 percent of all banks. In 2015, this figure was around launched for long-term funding for commercial banks at very attractive conditions 70 percent.5 The retail business therefore has little room for manoeuvre. («targeted longer-term refinancing operations»). In addition, the ECB wants to leave its key interest rates unchanged at zero percent until at least the end of 2019. The The low interest rate environment also poses a significant stability risk for pensions. explanation for this decision is the continued fragile environment in terms of sover- Pension benefits for occupational pension plans by far exceed the current contribu- eign debt and the situation in the banking sector in a number of member states. It tions and returns generated. The existing imbalance between pension benefits for is therefore unlikely that the low interest rate policy will change in the near future. contributors and new retirees will therefore increase. Moreover, despite unattractive interest rates, the expectation of low pensions leads the working population to Due to the continued upwards pressure on the Swiss franc, the SNB wants to keep increase their savings, which reduces the effectiveness of the central bank’s interest negative interest rates in place. However, the risks associated with this policy are rate instrument (cf. chapter III. 3). increasing at the same rate as the effectiveness of the extraordinary monetary policy interventions of the central banks is decreasing. The SNB is faced with a Conflict surrounding trade relations between USA and China so-called monetary policy trilemma, in which only two of the following three objec- Global economic growth slowed substantially in the second half of 2018. The tives can be achieved at the same time: «stable exchange rates», «free movement reasons for this are twofold: the growth slowdown in the eurozone and the trade of capital» and «autonomous monetary policy». According to the International conflict between the US and China.6 The US is currently imposing tariffs of up to Monetary Fund’s (IMF) country report, however, there is room for manoeuvre with 25 percent on various products from China. China, in turn, has reacted to every regards to fiscal policy. It recommends that structural surpluses not be used for new measure introduced by the US with tariffs on US products. With the 2020 debt reduction, as has been the case so far, but instead for additional expenditures presidential elections drawing nearer, the US is unlikely to reverse its protectionist that will support the economy. With this recommendation, the IMF is contradicting measures. a group of experts appointed by the Federal Council which attributes these sur- pluses not to underspending, but to prudent budgeting and describes the level of Protectionism has risen around the world since the financial crisis. While in an initial taxation as being too high. In addition to this, the implementation of the Tax pro- phase, the focus was mainly on boosting subsidies and export incentives for posal and AHV financing (TRAF) will result in lower tax revenues for the federal (domestic) companies, nations are once again increasingly turning to tariffs on government in the short-term. imports competitive depreciations. Since November 2008 governments of 36 states worldwide have introduced around 348 trade-distorting measures.7 As a small, At the end of 2018, around CHF 269 bn in sight deposits attributable to the banks and other financial market participants were subject to negative interest rates in 4 Swiss National Bank (2019). Annual Report 2018. 5 Ernst & Young (2019). EY Banking Barometer 2019 – Signs of the times. 6 International Monetary Fund (2019). World Economic Outlook. 7 Global Trade Alert Report (2019). Jaw Jaw not War War – Pritoritising WTO Reform Options.

16 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 17 I The Swiss banking sector

open economy, Switzerland is particularly reliant on global market access and a regulations for the entire banking sector. Recognition of the equivalence of Swiss rules-based trading system. A decline in global economic growth would also further financial market regulation is also of great importance. Banks in Switzerland are delay the normalisation of the Federal Reserve’s and the European Central Bank’s striving to fundamentally improve equivalence procedures so that they become interest rate policies and increase the upwards pressure on the Swiss franc. more objective, reliable and predictable. The aforementioned approaches, however, are essentially linked to the conclusion of an institutional framework agreement The European banking union and big banks with the EU. Since the financial crisis, US and Chinese banks have grown strongly, while in Europe 8 they have contracted significantly. The differences between the US and The Federal Council decided in December 2018 to hold consultations on the out- Europe are mainly attributable to the successful handling of the financial crisis in the come of the negotiations on the framework agreement. The aim was to find a US. In contrast, a number of European banks remain in bad shape. Efforts to estab- common position with regards to the outstanding issues relating to the accompany- lish an EU banking union are currently in a holding pattern. Without such a banking ing measures and the Citizens’ Rights Directive in order to be able to take these union, it will not be possible for a big pan-European bank to emerge. The big banks issues up again with the EU. According to the Federal Council, the consultation in Switzerland have realigned themselves and sharpened the focus of their business. revealed a need for clarification with regards to the provisions on wage and However, without Swiss big banks that provide investment banking services, access employee protection, state aid and the Citizens of the Union Directive. If a satisfac- to international capital markets depends entirely on foreign countries. Sustainable tory solution can be found in these three areas, the Federal Council is prepared to growth for the Swiss big banks is therefore key for the Swiss economy. sign the agreement. Although the European Commission has signalled that it is prepared to provide clarifications in supplementary declarations, it has ruled out a Bilateral relationships Switzerland-EU: market access and recognition of renegotiation of the framework agreement. Many elements of the current negotia- equivalence tion outcome are positive and advantageous for Switzerland. The framework agree- The cross-border wealth management business with private clients from the EU is ment sustainably strengthens bilateral relations with the EU. Not only will legal an important export industry for Switzerland. This segment employs approx. 20,000 certainty be solidified thanks to reliable and clearly defined processes, the founda- people in Switzerland and generates tax revenues of approx. CHF 1.5 bn per year.9 tion will also be laid for maintaining and improving market access. The SBA there- However, due to the restrictions on market access, it is becoming increasingly fore supports the conclusion of a framework agreement. difficult for internationally-oriented Swiss banks to meet the needs of foreign investors. In investment management, assets of approx. CHF 100 bn are managed Due to the European Commission’s view that too little progress had been made on for institutional EU clients. The importance of market access is growing, as the the framework agreement, the recognition of Swiss stock exchange equivalence home market is becoming increasingly saturated and the demand for investment was not extended beyond 1 July 2019. In order to protect the Swiss stock exchange management will rise in the EU. infrastructure, the Federal Council has in turn decreed that trading venues domi- ciled in the EU can no longer trade in certain stocks of companies domiciled in To ensure that value creation, jobs and tax revenues remain in Switzerland, market Switzerland. This ensures that the Swiss stock exchange remains the reference access solutions are required. These should at least provide such access to institu- market for Swiss equities. Unlimited recognition of stock exchange equivalence tions interested in active market access, without Switzerland having to adopt EU remains key for the Swiss financial centre. The current solution is only second-best and is not beneficial for the Swiss capital market. 8 8 Swiss Banking Association SBA (2019). Does Switzerland need big banks? Discussion paper SBA. 9 Swiss Bankers Association SBA (2019). Market access for Swiss banks – Significance and perspectives. SBA background paper.

18 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 19 I The Swiss banking sector

Brexit Shift in jobs Following the rejection of the withdrawal agreement by the British Parliament three Job profiles in the banking sector are changing due to new digital technologies. times, the EU has granted a postponement to the UK and has extended its with- It is expected that jobs will shift away from the back office and move to IT, credit drawal until 31 October 2019. It remains to be seen what strategy Britain will and risk management, research and product development as well as to intragroup pursue. The Swiss banks are preparing accordingly for various Brexit scenarios. service companies without a banking license (see also Chapter II.4). This change can also be seen in the employment trend in the banking sector; the number of people employed (in full-time equivalents) fell by 1.3 percent in 2018. As in the previous I. 2 Structural change and growth areas year, part of this decline can be explained by the fact that jobs were shifted to intragroup entities that are not included in the banking statistics. This kind of shift Value added is likely to further increase in the future, meaning the statistics for employees in Despite challenges such as negative interest rates, ever-increasing regulation, digital- the banking sector will become less representative and that it will be necessary to isation and greater demands in terms of its competitiveness, the financial sector is broaden the banking statistics in order to track this trend. making an important contribution to the Swiss economy. In 2017, it generated a share of 9.2 percent of Switzerland’s gross value added. At 2.1 percent, the rise in Digitalisation is giving rise to a change in the type of skilled labour required and is value added was slightly above the Swiss average.10 In addition to this, banks and increasing the necessity for further internal training at banks in order to maintain insurers trigger additional value added in other sectors through their purchase of the employability of staff. It is for this reason that since 2016, the Employers Associ- goods and services and as a result of their employees’ consumption. Due to regula- ation of Banks in Switzerland has been offering a competency development pro- tory requirements (in particular the so-called too big to fail regulation), banks were gramme called Skills 4.0 to equip experienced bank employees for the new working forced to adjust their organisational structures, which also led to the transfer of environment.12 Leveraging the maximum potential of bank employees is also staff to intra-group service companies without a banking licence. becoming more important in light of an increase in the average time required to recruit employees. The banks’ direct value added therefore appears to be lower than it actually is.11 Issues of differentiation also exist, for example, in the case of digital platforms Locational advantage for fintech and blockchain (crowdfunding, payment transactions), which are not operated directly by tradi- As a location, Switzerland offers outstanding advantages (in particular proximity to tional financial institutions but are very closely linked to the financial institutions. educational institutions, research and innovation, a relatively liberal labour market, an entrepreneurial environment with business-friendly framework conditions, a high quality of life) and has positioned itself well for fintech companies. The Federal Council has emphasised that it wishes to create the best possible framework condi- tions for the establishment and further development of fintech and distributed ledger technology (DLT) companies.

10 Polynomics (2018). Banks and insurance companies in Switzerland – Analysis of the national economy significance of the financial sector 2017. 11 Also not included in valued added is consumer surplus. Digitalisation and the intensified competition it brings with it can result in lower prices and therefore lower value added, even though consumer surplus increases as a result. The qualitative improvement of products and the therefore the ensuing greater customer benefit at unchanged prices are not reflected in value added. 12 Employer Banks (2019). The Swiss Banks on the way to a new world of work. Media notification.

20 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 21 I The Swiss banking sector

The Institute of Financial Services Zug’s (IFZ) fintech hub ranking attests to just how mum of CHF 100 m. These companies are subject to significantly less comprehen- successful Switzerland has been in developing into a leading global centre for fintech sive regulation than when obtaining a banking licence, which fintech companies in the area of DLT: like last year, Zurich and Geneva ranked second and third.13 In can also apply for. Since 2017, it has also been possible for them to accept public 2018, 136 new fintech companies were established in Switzerland, which corre- funds of up to a maximum of CHF 1 m without FINMA supervision or approval sponds to an increase of 62 percent. At the end of 2018, there were 356 such («sandbox»). This graduated approach lowers the barriers to entry for fintech com- companies in Switzerland. The growth took place primarily in DLT, where the num- panies and creates scope for innovation. At the same time, it ensures that Switzer- ber of companies increased more than threefold. land’s high level of investor protection is upheld.

With this growth, the demand for corporate accounts at banks in Switzerland has Digital assets («Token Economy») also increased. When opening an account, banks must at all times adhere to the At the request of the Federal Council, the Blockchain / ICO working group has due diligence requirements, which can be a challenge especially for companies with formulated the legal bases for DLT and blockchain with a focus on the financial DLT-based business models. The SBA published guidelines on this matter in autumn sector and identified possible courses of action. The report was published in 2018. In doing so, the association is supporting the best possible framework condi- December 2018 and shows that the legal framework conditions in Switzerland are tions for a diverse fintech ecosystem.14 The fact that Geneva has been selected as generally good and that amendments are required only in isolated areas. The the location for the launch of the cryptocurrency Libra by a consortium of renowned Federal Council subsequently drafted measures to be implemented and in March companies under the leadership of Facebook also highlights the attractiveness of 2019, the consultation process began. On the one hand, the measures focus on Switzerland as a location. This move is likely to benefit Swiss fintech start-ups. increasing legal certainty when transferring DLT-based assets. On the other hand, a new authorisation category for «DLT trading facilities» is to be created within Collaboration between fintech companies and banks has proven to be a winning financial market infrastructure law for services in the areas of trading, clearing, strategy. Start-ups offer an ideal platform for developing and swiftly implementing settlement and custody of DLT-based assets. In the future, they are also to receive new business ideas. The banks, in turn, have the knowledge needed in terms of authorisation to operate as a securities firm. The SBA welcomes the Federal Coun- regulation and the safekeeping of assets and data. As a result of their experience in cil’s initiative, but sees a need for greater specification with regards to certain this area, they enjoy a high level of trust and have an advantage when it comes to terminologies and a more consistent alignment with existing legislation. customer acquisition. Switzerland’s good framework conditions for digital assets are also reflected in the Successful collaboration between fintech companies and banks makes it possible to fact that the world’s first fully integrated trading, settlement and custody infrastruc- benefit optimally from the complementary strengths on both sides. ture for digital assets is being set up by the SIX Swiss Exchange. The SIX Digital Exchange is expected to be launched in late summer 2019. The fact that fintech companies and banks have different areas of focus has also been taken into account in regulation. Since 1 January 2019, fintech companies that The Federal Council also had an assessment conducted to determine whether an do not operate in the banks’ core business areas, i.e. the interest margin business, adjustment is needed to the prevention of money laundering and terrorist financing can obtain a so-called fintech licence and can accept public funds of up to a maxi- legislation with regards to crowd-donating and crowd-supporting platforms. How- ever, due to the relatively modest funds collected via these platforms, it believes 13 Institute of Financial Services Zug (2019). FinTech Study 2019 – An Overview of Swiss FinTech. that making these subject to the Anti-Money Laundering Act would be incommen- 14 Swiss Banking Association SBA (2018). SBA’s guidelines on the opening of company accounts for block- surate at this time. chain companies.

22 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 23 I The Swiss banking sector

Open Banking Cloud Banking In order for bank customers to gain easy access to the fintech ecosystem using their Cloud services make it possible for banks to forego complex and expensive internal existing banking relationship, the data interfaces between the individual providers IT infrastructures and to buy computing capacity as needed. Cloud banking is must be defined and standardised. Since January 2018, the revised Payment Ser- therefore particularly attractive for small banking institutions. However, in the past, vices Directive (PSD2) has obliged banks in the EU to provide third-party providers Swiss banks have hesitated to migrate their data to the cloud, as there are certain (payment and account information service providers) with access to customer data questions relating to the legal and regulatory framework conditions that have not and to provide the necessary interfaces free of charge. This gives non-bank provid- yet been addressed. Together with member institutions, auditing firms and provid- ers access to sensitive customer data; however, the client can revoke consent for ers, the SBA therefore developed guidelines in this area which were published in the sharing of their data at any time. In the course of the implementation work, it March 2019.15 became apparent that there are numerous issues that must still be addressed with regards to the development of secure communication standards and the standardi- A working group identified four areas that are key for migrating to the cloud and sation of interfaces, and that legal uncertainty therefore exists. Preliminary ideas on developed corresponding recommendations: the selection of the cloud provider, the how to further refine the directive (PSD-3) are being considered. handling of data, collaboration with the authorities, in particular with regards to legal measures, and the auditing of institutions in the area of cloud services and the In Switzerland, the banks already selectively grant third-party providers access to cloud infrastructure. With the legally non-binding recommendations in these four accounts and open their client interfaces if this is in the mutual interest of both the areas, the SBA offers banks a solid foundation for the proper use of cloud banking. bank and customer. However, the banks are under no legal obligation to do so. Every banking institution decides for itself whether and how data is migrated to the Switzerland is therefore pursuing market-based solutions. Open banking has existed cloud. Also helpful for the banks is the fact that a growing number of international in Switzerland for many years already, in particular for corporate clients. The infra- cloud providers are establishing their own physical data centres in Switzerland. structure operator SIX is currently developing a centralised interface infrastructure together with a group of Swiss banks and third-party providers which is to effi- Sustainable Finance ciently connect banks and third-party providers. The market for sustainable investing has experienced strong growth in Switzerland. According to Forum Nachhaltige Geldanlagen, sustainable investments (SI) are those Since January 2019, companies with a fintech licence and a payment transaction whose investment processes incorporate environmental, social and governance business model can have their own current account directly with the SNB. This (ESG) criteria in their financial analysis. The most recent market analysis conducted would eliminate the need for prescribed authorisation for access to bank customer by the Swiss Sustainable Finance association documents impressive growth of data. 83 percent for sustainable investments in Switzerland between 2017 and 2018. The record growth seen in the previous year was therefore once again surpassed.16 This strong increase is attributable to a rise in the reported sustainable investment funds (+102 %) and greater demand from institutional investors (+99 %). For funds man- aged in Switzerland, the share of sustainable investments is now at 18.3 percent.

15 Swiss Banking Association SBA (2019). Cloud Guidelines – A guide to secure cloud banking. 16 Swiss Sustainable Finance (2019). Swiss Sustainable Investment Market Study 2019.

24 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 25 I The Swiss banking sector

At 31 percent 17, the share is even greater for funds managed by Swiss pension Also under discussion is whether the SNB will in future create electronic central funds and insurers. This is substantially higher than in global investment manage- bank money. This could either come in the form of a new payment method or the ment, where the share of sustainable investments was around 11 percent in 2018.18 possibility of a central bank account for all. To date, no central bank has introduced such an electronic payment method. So far, the future of the financial centre advi- Future topics: data safe Switzerland and digital Swiss francs sory board does not see any true advantages in introducing this type of system, but As digitalisation advances, new spheres of activity are opening up for the Swiss has identified a number of risks for the effective implementation of monetary policy financial centre. In its latest report, the advisory board for the future of the as well as financial stability. financial centre, which was appointed by the Federal Council, examines how Switzerland could position itself as a location for the storage of virtual financial data. The Swiss financial centre would benefit here from its global reputation as a I. 3 Regulation haven of security, discretion and comprehensive protection of its clients’ data. However, this gives rise to an important question: how Switzerland could FIDLEV, FINIV and AOV independently guarantee data security, because even if the data safe were located In October 2018, the Federal Council began the consultation process for FinSO, in Switzerland, the technological components of such a safe would have to be FinIO and SOO, which was concluded on 6 February 2019. FinSO (Financial Services purchased from other countries such as the US or China. It is also unclear whether Ordinance) fleshes out the duties of financial services providers vis-à-vis various effective protection of data is compatible with the connectivity to the international customer groups as well as the requirements for the new register of client advisors, value chain. Ultimately, a data safe would entail certain risks, as one single mistake client documentation, ombudsman services and the key information document. The is all it would take to suffer significant reputational damage.19 latter enables customers to compare different financial instruments. FinIO (Financial Institutions Ordinance), on the other hand, more precisely defines the authorisation The launch of the cryptocurrency Libra could result in major changes in the global conditions and duties for different financial institutions as well as their supervision. payment system and require that adjustments be made (see further information The requirements for obtaining a banking licence are the most comprehensive, under «Locational advantages for fintech and blockchain»). Many government while the requirements for managers of collective assets, fund management com- authorities, particularly in the US, have raised a number of legal and regulatory panies and securities dealers are less extensive. SOO (Supervisory Organisation questions with regards to this project. This potentially ground-breaking project will Ordinance) governs the authorisation conditions and activities of the newly intro- only be realisable if their concerns are allayed. duced supervisory organisations (SO).

The SBA submitted its position on these ordinances, wherein it proposed various changes, in particular in the areas of acquisition and disposal of financial instru- ments, advertising and offering, the design of the basic information sheet and 17 However, investors who want to invest in index products are facing difficulties. These also include titles of provisions for the FinSO prospectus law. weapons manufacturers who violate the ESG Social Criteria. Under the leadership of the Swiss Sustainable Finance Association, a large number of institutional investors have joined forces to call on global index providers to appeal to controversial weapons manufacturers, such as anti-personnel mines, cluster Banking Act munitions as well as biological, chemical or nuclear weapons from their main indices. The Federal Council initiated consultations on the partial revision of the Banking 18 McKinsey (2019). Performance Lens Global Growth Cube; Global Sustainable Investment Alliance (2014, 2016 & 2018). Act in March 2019. The revision focuses on deposit insurance, bank restructuring 19 BAdvisory Board on Future Financial Centre (2018). Annual report 2018 for the attention of the Swiss and the segregation of own and customer portfolios for custodians of intermedi- National Council.

26 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 27 I The Swiss banking sector

ated securities. The revision of deposit insurance focuses on a shortening of the Capital Adequacy Ordinance payout deadline, a new financing model and an increase of the «system ceiling». As part of the implementation of the so-called small banks regime, the Federal With regards to the insolvency provisions for banks, certain provisions that are Department of Finance initiated consultations on a change to the Capital Adequacy today found in the FINMA ordinance will now be anchored at the legislative level. Ordinance in April 2019. It is envisaged that small, particularly liquid and well-capi- This mainly relates to provisions for the treatment of the rights of bank owners and talised banks and investment firms will in future be subject to simplified require- creditors. Rules to strengthen the stability of the mortgage bond system are also ments for the calculation of capital requirements and that other reductions to the foreseen. regulatory burden will apply. In parallel to this, FINMA launched a consultation on changes to various circulars. The objective of this regulatory initiative is to take into In the interests of further increasing the security and stability of the financial centre, account the heavy burden of increasingly complex regulation for small institutions the banking sector is prepared to bear additional costs for the implementation and and to improve proportionality in banking regulation. The SBA deems the proposed operation of the new deposit solution. In return, it should be ensured that at the criteria for coming under the small banks regime to be appropriate but considers ordinance level, the outcome of the revision is cost-neutral in terms of capital and the envisioned thresholds to be disproportionately high. Overall, this is a welcome liquidity requirements. It is also inherently desirable that the insolvency provisions initiative, one that the SBA has significantly contributed to shaping over the past for banks be anchored at the legislative level. It must be ensured, however, that the months. rules are not tailored to limited companies only and that FINMA is given sufficient discretionary power for practical solutions in order to be able to handle individual To increase the resilience of the banks to possible housing crises, mortgages for claims separately. high-risk Swiss residential investment properties are to be financed with a higher level of own funds. However, if the banks develop self-regulation that is at least FINMASA equally effective, this will be given precedence. The SBA intends to amend its In May 2019, the Federal Council initiated consultations on a new ordinance to the guidelines on minimum requirements for mortgage financing correspondingly and Financial Market Supervision Act (FINMASA). The consultations were held until 22 has submitted a proposal to FINMA for approval as a binding minimum standard. August 2019. The draft ordinance concretises FINMA’s competencies in international According to this proposal, the minimum down payment for mortgages on invest- matters and regulation. The current regulatory instruments in the form of the ment properties would be 25 percent of the lending value (currently 10 percent) ordinance and the circular will remain in place. The ordinance specifies how propor- and the mortgage would have to be amortised to two-thirds of the lending value tionality, differentiation and international standards should be taken into account in of the property within a maximum of 10 years (currently 15 years). Both measures regulatory activities. The draft also defines the main aspects for collaboration and can make an effective contribution to further stabilising the real estate / mortgage the exchange of information between FINMA and the Federal Department of market. The SBA assumes that the Federal Council will give preference to self-regu- Finance. The SBA submitted its position on the draft ordinance. The following are lation by the sector and that it will dispense with introducing the CAO measures. the most important principles for the banking sector: the sector should be involved in the regulatory process early on and continuously. The principle of legality must Finally, stricter capital requirements are to further improve the capitalisation of the be adhered to. In addition, regulatory projects should always be subject to a parent banks of systemically important banks in the event of a crisis. The stricter cost-benefit analysis. Good regulation should also be principles-based and com- requirements would apply to UBS, Credit Suisse, Postfinance, Raiffeisen and Zürcher mensurate, and their impact on international competitiveness must be verified. Also Kantonalbank. key for the banks is the recognition of their possibility to self-regulate.

28 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 29 I The Swiss banking sector

Revision of the CDB and the Anti-Money Laundering Ordinance Electronic identity In its fourth country evaluation of Switzerland in 2016, the Financial Action Task The reason for the creation of an electronic identity (e-ID) for natural persons is to Force on Money Laundering (FATF) identified certain areas where improvements are unequivocally verify the identity of a person electronically. An e-ID makes it possible needed in the Swiss measures in the fight against money laundering and terrorist to execute online payment orders more quickly and in a straightforward manner, financing. Subsequent to this, Switzerland initiated a number of legal and regula- supports the development of online businesses and can be used for various tory amendments. To also enshrine the amendments called for by the FATF at the e-government applications. The Federal Council’s bill stipulates that the official self-regulation level, the SBA revised its current code of conduct with regards to the verification and confirmation of the existence of a person and their identifying exercise of due diligence (CDB 16). features remain the responsibility of the government. In contrast, responsibility for the development and issuing of the electronic identity is to be assumed by the The revised CDB (CDB 20) contains the following changes: the contracting partner private sector. The e-ID is therefore a collaboration between the public and the must now be identified starting from CHF 15,000 (to date from CHF 25,000), the private sectors. The private sector makes it possible for the e-ID to be used for FINMA circular regarding video and online identification has been formally incorpo- a large number of applications, thus also facilitating its rapid dissemination. For its rated into the CDB and the provisions for the abbreviated process before the super- part, the government will ensure that it is not possible for the data to be misused. visory board have been updated. The rules for account openings with incomplete documentation were also tightened. Such accounts must now be blocked for all In a first reading, both the National Council and the Council of States were in clear transfers into and out of the account and the business relationship must be dis- agreement with this division of responsibilities. To take account of public concerns solved if the missing information and documents are not submitted within 30 days. about such a division of responsibilities, the Council of States has proposed that the The new CDB 20 will enter into force on 1 January 2020 together with the Anti- control measures be tightened. In addition, instead of the administration approving Money Laundering Ordinance-FINMA, which has also been revised. and monitoring the issuers of the e-ID, an independent body was to do so. The National Council’s committee for legal affairs, however, is against such a body, Anti-Money Laundering Act which they see as unnecessary and expensive bureaucratisation. As originally Also part of the amendments outlined above is the revision of the Anti-Money planned, control is to be carried out by the Federal IT Steering Unit. Laundering Act. The Federal Council’s dispatch stipulates that financial intermediar- ies must identify the beneficial owner and verify their identity with the requisite due The SBA is convinced that the planned division of responsibilities will make it possi- diligence. In addition, financial intermediaries are now required to periodically review ble to disseminate the e-ID rapidly and nation-wide. In particular, this means that the necessary information to ensure it is up to date and if necessary, update it. the banks’ experience in the secure handling of personal data and the verification of customer identities can be optimally leveraged. In order for the electronic identity The SBA supports the revision in principle and is currently conducting an in-depth to enjoy success Switzerland-wide, the number of possible use cases is key. It will analysis of the dispatch published on 26 June 2019. If necessary, it will once again only be possible to have a sufficiently high number of use cases if the government provide input. and the private sector work together. Otherwise, Switzerland runs the risk of falling behind in the digitalisation of its economy.

30 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 31 I The Swiss banking sector

Amendments to data protection legislation playing field is level, i.e. whether the relevant competing financial centres imple- The current data protection legislation dates back to 1993 and is no longer up to ment the AEOI with our partner states. The Federal Council is satisfied that these date due to the technological developments that have taken place since that time. criteria are met by all partner states.20 At present, 108 nations have committed to The Federal Council has therefore decided to undertake a total revision of the the AEOI standard. The introduction of the AEOI with the last 19 of these countries Federal Data Protection Act that will be conducted in two steps. is currently pending in Parliament.

In a first step, it will be ensured that Switzerland remains able to act in the Schen- Domestic implementation of the AEOI standard is being examined by the Global gen area with regards to criminal prosecution, the execution of sentences and Forum on Transparency and Exchange of Information for Tax Purposes (Global public safety and that it continues to receive data from European law enforcement Forum) with a view to creating the same competitive conditions globally. Compre- agencies in an efficient manner. The amendments necessary to this end came into hensive country evaluations will be conducted starting in 2020. First, however, the force on 1 March 2019 (Datenschutzbestimmungen für die Schengener Zusamme- key elements will undergo a step-by-step preliminary examination in order to ensure narbeit in Strafsachen; SDSG). It is envisaged that the SDSG will be rescinded as the integrity of the AEOI standard from the outset. As part of this preliminary exami- soon as the new Federal Act on Data Protection (FADP) enters into force. The nation, the Global Forum has made a number of recommendations for Switzerland second step concerns the closer alignment of the Swiss FADP with the European which the Federal Council has addressed and sent for consultation in February 2019. General Data Protection Regulation. The revision of the FADP is in particular aimed at bringing data protection in line with the realities of the internet age and Federal court’s judgment on deliveries of data to France strengthening the position of citizens. In addition, the amendments are to ensure The Federal Court in Lausanne on 26 July 2019 decided on the procedure between that cross-border data transfers between Switzerland and the EU countries remains the Federal Tax Administration and UBS for mutual assistance to France. The judg- possible without any additional hurdles. This so-called draft 3 will be in consultation ment requires UBS to deliver approximately 40,000 records of French UBS clients to during the autumn session. the French tax authorities. The verdict holds risks for Swiss Banks. The functionality and attractiveness of the Swiss financial centre is based essentially on the basic rules For the SBA, it is particularly important that Switzerland foregoes a «Swiss finish» in of legal certainty of all actors. The previously applicable minimum requirements for the legislation and that the rules do not go beyond the amendments necessary to a request for administrative assistance could be lowered with this judgment. uphold the existing adequacy decision of the European Commission EU Mandatory Disclosure Regime The EU directive that requires intermediaries (tax advisors, banks, lawyers, etc.) to I. 4 Tax and Compliance report certain cross-border tax arrangements of their customers to the national tax authorities came into force on 25 June 2018. These notifications are automatically Developments in AEOI exchanged between the tax administrations of the EU member states. The member In September 2018, Switzerland exchanged information with 36 partner states for states are also free to establish rules on disclosure requirements that go beyond the the first time. Data is to be exchanged with an additional 37 countries starting in directive. Transposition into national law must take place at the latest by the end of autumn 2019. In the lead-up to the data exchange, the Federal Council assessed 2019, however, all activities initiated after 25 June 2018 are also impacted. Various whether these partner states effectively comply with the global standards for the Automatic Exchange of Information (AEOI). It evaluated the level of confidentiality and the measures for data security and data protection as well as whether the 20 Federal Council report on the review mechanism to ensure standard-compliant implementation of the AEOI 2018 / 2019.

32 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 33 I The Swiss banking sector

EU member states have already enacted the corresponding rules prior to the dead- For the reform outlined by the Federal Council, it is important for the banks that line. Swiss intermediaries who operate in EU countries are also impacted by this the complexity and costs of the new system are kept low. According to the parame- directive. They should therefore closely review tax arrangements that involve the ters set out by the Federal Council, the new system should not be too complex. eurozone to ensure that the criteria for a reporting obligation are met. The Federal Council aims to launch a public consultation on a proposal in autumn Tax reform and AHV financing (TRAF) 2019. A parliamentary initiative from the National Council’s Economic Affairs and Voters and the cantons adopted TRAF in May 2019. As a result, all companies will Taxation Committee EATC goes in a similar direction. For the time being, however, be subject to the same, internationally accepted taxation rules in the future. The tax the EATC wishes to wait until the Federal Council has introduced its proposal before burden for status companies will increase, while companies that were taxed as moving ahead in this area. normal will pay less taxes. To offset this, many cantons are planning to reduce taxes on earnings. The adoption of the proposal means that affected companies enjoy Digital Tax legal certainty and that the attractiveness of Switzerland as a business location The current rules for the taxation of companies that operate internationally are remains intact. The Swiss banks will also benefit from this. criticised for no longer being in line with the realities of the current, increasingly digital economy. A physical presence in the form of business premises, which would Stamp duty and withholding tax constitute a tax obligation, is no longer required in order to conduct business Stamp duty and withholding tax are clear tax obstacles and slow down the growth activities in a country. A digital presence, which is difficult or even impossible to of the financial centre. account for and can therefore not be fully taxed, is sufficient.

None of the competing financial centres, such as the UK, Singapore, the US or In February 2019, the OECD presented a consultation document containing a Hong Kong, have comparable taxes. They therefore have a substantial advantage number of possible solutions. Common to all the proposals is that part of the over Switzerland. profits would in future have to be taxed at the place where users reside, irrespective of the physical presence of the company. However, concrete differences exist with At the end of June 2019, the Federal Council published the parameters for a regards to the scope and type of companies affected. The objective is to develop a planned reform of the withholding tax. The Federal Council does not want to consensual solution by 2020. reform withholding tax as a whole, primarily for financial policy reasons. It proposes a reform to strengthen the debt capital market. This concerns withholding tax on For the time being, the EU has refrained from introducing a digital tax. In March interest, where the system is to be changed to relieve foreign investors and domes- 2019, the introduction of a tax of three percent on the sale of certain digital ser- tic legal persons of withholding tax. This would release a major brake on the issu- vices did not receive the necessary unanimous approval from the EU finance minis- ance of Swiss debt capital and could revive the heavily underdeveloped Swiss bond ters. For countries such as Ireland, the fact that the tax would be levied on turnover market. The Federal Council would also like to abolish stamp duties on trading in and not on profits, as is customary with corporate taxation, in particular met with Swiss bonds as far as possible, as these duties are an obstacle to trading. disapproval. Among other things, this would have resulted in problems arising from the blurring of lines between that and value added tax. Irrespective of this, France introduced such a digital tax in January 2019 and similar provisions are planned in Austria and the UK.

34 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 35 I The Swiss banking sector

Switzerland would be strongly impacted by a revision of taxation rights for corpo- Fig. 3 rate profits. On the one hand, this is because there are many corporate headquar- Selected events that moved the market place ters and internationally-oriented SMEs in Switzerland, and on the other hand because Switzerland is a comparatively small sales market. The Swiss tax authorities When Reporting Issue would therefore have to expect to see considerable losses. Jan. 18 Regulation The second Payment Services Directive (PSD2) comes into force in the EU. Jan. 18 Regulation The Federal Council initiates consultations on the implementation of the recommendations of the Global Forum on Transparency and Exchange of Within the scope of the OECD debate, Switzerland is committed to ensuring that Information for Tax Purposes (Global Forum).

the place of value creation remains decisive for the allocation of profits and that tax Feb. 18 Taxes and Compliance The OECD initiates consultations on the «Preventing abuse of residence by competition is not restricted. There are no plans for the introduction of a Swiss investment schemes to circumvent the CRS «initiative». digital tax. March 18 Taxes and Compliance The Federal Council adopts the dispatch on the Tax proposal and AHV financing (TRAF).

April 18 Economic policy The Federal Council adopts the revised national strategy for Switzerland’s protection environment against cyber risks (NCS).

April 18 Taxes and Compliance The advisory board for the future of the financial centre publishes its recommendations for withholding tax reform for the attention of the Federal Council.

May 18 Structural change The financial market policy forum informs the Federal Council of the possibilities for and growth areas strengthening the competitiveness of the Swiss financial centre.

May 18 Industry development Founding of the association of Swiss regional banks.

June 18 Regulation The Federal Council adopts the dispatch on the Federal Act on Recognised Electronic Means of Identification (e-ID law).

June 18 Economic policy The Federal Council adopts contingency measures to protect the Swiss stock market environment infrastructure.

June 18 Regulation The Swiss voting public votes decisively against the Sovereign Money Initiative.

July 18 Regulation The FINMA fleshes out the announced regime for small banks and launches a pilot phase. The objective is to establish a regulatory regime with significantly reduced complexity.

July 18 Regulation The SBA publishes the revised Agreement on the Swiss banks’ code of conduct with regard to the exercise of due diligence (CDB 20).

Aug. 18 Taxes and compliance The Federal Council adopts the dispatch on the multilateral convention to implement tax treaty-related measures to prevent base erosion and profit shifting (BEPS).

Sept. 18 Structural change The Bankers Association publishes guidelines for opening corporate accounts for and growth areas blockchain companies.

Okt. 18 Regulation The Federal Council initiates consultations on the implementing provisions for FinSA and FinIA.

Nov. 18 Economic policy The National Working Group on Reference Rates announces that LIBOR is to be environment replaced by SARON.

Nov. 18 Economic policy Swiss voters reject the Self-Determination Initiative. environment

36 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 37 I The Swiss banking sector

Nov. 18 Structural change SIX announces that it will build a Swiss corporate API as an interface between banks June 19 Structural change Facebook announces the introduction of the cryptocurrency Libra. and growth areas and third-party providers. and growth areas

Dez. 18 Economic policy The Federal Council announces that it will conduct a consultation on the June 19 Economic policy The Bankers Association holds the Politforum for the first time. The objective thereof environment institutional framework agreement with the EU. environment is to strengthen the dialogue between the banking sector and the government.

Dez. 18 Structural change The Federal Council adopts a report on the legal framework for blockchain and June 19 Taxes and Compliance The Federal Council resolves to once again to undertake a reform of withholding tax and growth areas distributed ledger technology (DLT) in the financial sector. and adopts the objectives and parameters thereof.

Dez. 18 Structural change The advisory board for the future of the financial centre publishes its annual report July 19 Economic policy Interest rate decision Fed. and growth areas for the attention of the Federal Council. environment

Jan. 19 Regulation Systemically important domestic banks must now also hold gone concern capital July 19 Economic policy The European Commission does not further extend the recognition of the equiva- for their possible restructuring and resolution. environment lence of Swiss stock exchanges. In turn, the Federal Council activates contingency measures to protect the Swiss stock exchange infrastructure on 1 July 2019. Jan. 19 Structural change Fintech companies can accept public deposits of up to CHF 100 m under relaxed and growth areas conditions provided these are not invested and no interest is paid on them.

Feb. 19 Taxes and compliance The OECD presents a consultation document with various proposals for the intro­ duction of a digital tax.

March 19 Regulation The Federal Council initiates consultations on the partial revision of the Banking Act.

March 19 Taxes and compliance The EU foregoes the introduction of a digital tax.

March 19 Industry development Jörg Gasser, previously State Secretary for International Finance, becomes the new CEO of the Bankers Association. Daniela Stoffel becomes the new State Secretary for International Finance.

March 19 Structural change The Bankers Association publishes legal and regulatory guidelines for the use of and growth areas cloud services by banks and securities dealers.

March 19 Structural change The SNB announces that companies with a fintech licence will in future be able to and growth areas have a giro account at the SNB.

April 19 Regulation The Federal Council initiates the consultation on amendments to the Capital Adequacy Ordinance.

April 19 Economic policy The EU extends the Brexit deadline to 31 October 2019. The UK is obliged to environment participate in the European Parliament elections.

April 19 Structural change The SNB and the FINMA join the «Network for Greening the Financial System». and growth areas

May 19 Regulation The Federal Council initiates consultations on the new ordinance to the Financial Market Supervision Act.

May 19 Taxes and Compliance The Swiss electorate votes in favour of the Tax proposal and AHV financing (TRAF). The proposal is to come into force on 01.01.2020.

May 19 Economic policy A survey by gfs.bern shows that banks in Switzerland are generally perceived environment positively. They are regarded as reliable and secure and as important employers.

May 19 Taxes and compliance The Federal Council adopts the dispatch on the AEOI with an additional 19 partner states and approves the first review report.

June 19 Economic policy The Federal Council announces that it wants to sign the institutional framework environment agreement with the EU only after certain outstanding issues have been clarified.

June 19 Structural change Florian Schütz is appointed as the federal Cyber Security Delegate. He will be and growth areas responsible for the Competence Centre for Cyber Security.

38 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 39 II Consolidated trend in Switzerland’s banks

II. Consolidated trend in II. 1.1 Trends in 2018 Switzerland’s banks II. 1.1.1 Net income by banking activity Aggregate operating net income is calculated on the basis of net income from the Banks’ aggregate business performance in Switzerland commission and services business by CHF 0.3 bn (+1.2 %), the trading business rose by 4.6 percent to CHF 65.3 bn in 2018 compared by CHF 0.5 bn (+5.9 %) and other ordinary net income by CHF 2.6 bn (+28.6 %).21 Total net income remained almost unchanged compared to the previous year by to the previous year. The annual profit increased by CHF 2.9 bn to CHF 65.3 bn (+4.6 %). Looking back at the past 11 years, net income 17.3 percent to CHF 11.5 bn. 216 out of a total of 248 reached its lowest level in 2008, at CHF 49.0 bn. Compared with 2008, net income institutes generated a profit for the year. The Banks has risen by a total of CHF 16.3 bn (+33.5 %).

paid taxes of CHF 1.5 bn. Despite a continued decline in Fig. 4 employment of 1.3 percent to 90,660 full-time jobs and Net income by banking activity the drop in the number of institutions by 5 to 248, the in CHF bn labour market in the banking sector is robust. 49.0 54.3 61.5 59.1 59.0 60.8 61.4 64.6 62.5 62.5 65.3

100 80

90 70 5,4 80 60 5,6 8.9 11.6 5.0 5.8 6.3 11.3 9.0 5.7 6.0 6.0 11.8 8.3 7.6 8.6 70 50 5.5 8.7 8.6 7.7 8.2 30.0 3.5 6.2 24.5 23.9 22.4 60 40 25.8 24.9 23.6 23.4 20.9 21.7 22.0

50 30

40 20 23.7 24.8 24.1 24.0 23.5 21.4 22.2 19.4 19.8 20.8 20.9 II. 1 Bank net income 30 10 20 0 Aggregated net income in 2018 amounted to CHF 65.3 bn (4.6 %) in 2018. This is -8.1 the highest level since the financial crisis of 2008. Within the balance sheets, inter- 10 -10 2008 2009 2010 2 011 2012 2013 2014 2015 2016 2017 2018 est income, despite the low interest rate environment of CHF 23.5 bn (-1.8 %), was 0 -20 the biggest contributor to net income. The success of the remaining business units has increased continuously. Interest-earning business net income Trading business net income Commission and services business net income Other ordinary net income

Source: SNB

21 The values in the figures may deviate slightly from the values in the text due to rounding differences.

40 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 41 II Consolidated trend in Switzerland’s banks

The interest business biggest contributor to total net income Further rise in income from trading Accounting for 36.0 percent in 2018, net income from the interest-earning business Trading net income rose in 2018 by CHF 0.5 bn (+5.9 %) and totalling CHF 8.2 bn, it contributed the largest share to total net income. This notwithstanding the fact that accounted for 12.5 percent of aggregate operating net income. This rise is primarily the low interest rate environment continues to put a strain on the banks’ interest attributable to the big banks bank group (+CHF 0.5 bn) and the stock exchange margin business. Net income from the interest-earning business fell marginally from banks (+CHF 0.2 bn). When considering these developments, it should be kept in CHF 24.0 bn in 2017 to CHF 23.5 bn in 2018 (-1.8 %). The slightly negative net mind that stock markets in part saw sharp fluctuations and negative share price balance is the result of the fact that interest income (2018: +CHF 6.8 bn) increased developments in 2018. One reason for this was the further rise of political uncertain- less than interest expenses (2018: +CHF 7.3 bn). The significant difference between ties. This is due on the one hand to the trade war between China and the US, and the rise in interest income (2017: +CHF 1.3 bn) and interest expenses (2017: on the other hand to the ongoing uncertainties with regards to Brexit. These uncer- +CHF 1.4) compared with the previous year is the result of the big banks’ transfer tainties generally result in higher volatility and therefore to greater trading activity. in 2018 of relevant business activities from foreign subsidiaries back to the parent company. Compared with the big banks, the interest income of the other banks Clear rise in other ordinary income rose by CHF 1.0 bn and interest expenses by CHF 0.8 bn in 2018. Other ordinary net income rose by CHF 2.6 bn to CHF 11.6 bn (+28.6 %) and accounted for 17.8 percent of aggregate operating net income. This positive trend Another reason for the high interest expenses is negative interest rates. Last year, is due to an increase in income from participations of CHF 4.3 bn. The big banks the banks in Switzerland paid the SNB negative interest rates amounting to approx. accounted for a large share thereof (+CHF 4.0 bn). Among other things, they report CHF 2.0 bn, which corresponds to a rise of around CHF 27.3 m (+1.4 %) compared dividends paid by their subsidiaries under this item. These include subsidiaries in with the previous year. This accounts for around 8.6 percent of gross profit in 2018. Switzerland with their own banking licence. «Other ordinary income», in contrast, Since the introduction of negative interest rates in 2015, the banks have paid decreased by CHF 1.5 bn and is also primarily attributable to the big banks approx. CHF 6.8 bn in interest expenses to the SNB. (-CHF 1.4 bn). For the remaining income items, there were only slight changes compared with the previous year. Income from the disposal of financial investments Net income from the commission and services business increases again decreased. In contrast, income from real estate and «other ordinary expenses» Net income from the commission and services business was the second-largest increased slightly. contributor to aggregate operating net income, accounting for 33.7 percent thereof. It rose again in 2018, by 0.3 percent, and amounted to CHF 22.0 bn. II. 1.1.2 Net income according to banking groups The income items and commission expenses changed only slightly compared with the previous year. This is also reflected in the trading activities and stock The big banks (8.5 %), foreign banks (0.9 %), regional banks and savings banks exchange-related developments: although the number of IPOs in 2018 was the (0.2 %) as well as «Other banks» (2.1 %), comprising the groups «Other banks» and highest since 2001, which is likely to have positively impacted the commission and stock exchange banks, reported a rise in aggregate operating net income compared services business, markets at the same time recorded share price declines, thus with the previous year. Aggregate operating net income declined for the cantonal dampening income from the commission and services business. Commission banks (-0.2 %), Raiffeisen banks (-0.05 %) and private bankers (-4.4 %) bank income from the securities and investment business amounted to CHF 20.6 bn and groups. made the largest contribution to net income. Commission income from the «other services business» totalled CHF 4.2 bn from the lending business CHF 2.1 bn. Com- mission expenses amounted to CHF 5.0 bn.

42 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 43 II Consolidated trend in Switzerland’s banks

Fig. 5 Since 2012, the share of aggregate operating net income of the «other banks» increased from 10.4 percent to 17.9 percent. The big banks also grew their share of 22 Net income shares by bank group (excluding big banks) aggregate operating net income during this period, from 46.8 percent to 50.1

30 % percent (not shown). The shares attributable to the private bankers and foreign banks fell from 3.6 percent to 0.4 percent and from 18.4 percent to 11.2 percent 25 % during the same period. The decline experienced by the private bankers is related to the change in the legal structure of institutions since 2014. As a result, they have 20 % been categorised as stock exchange banks, which has led to structural breaks in the

15 % statistics for the «private bankers» and «stock exchange banks» bank groups. The decline experienced by the foreign banks is to some extent an international phe- 10 % nomenon. As part of restructuring efforts, the banks have reduced their interna- tional activities to selected areas of business. In addition to general margin pressure, 5 % the shrinking of the «cross-border premium» is a contributing factor. The shares

0 % attributable to the remaining bank groups have changed only slightly.

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 II. 1.1.3 Annual profit and taxes Foreign banks Cantonal banks Raiffeisen banks Other banks Private bankers Regional banks, savings banks Gross profit from the business operations of the banks in Switzerland increased by Source: SNB CHF 3.7 bn (+20.3 %) in 2018 and amounted to CHF 22.2 bn. This increase is mainly attributable to the rise in depreciation (+CHF 2.8 bn) as well as the simultaneous Due to the different increases in aggregate operating net income, there were slight decline in operating expenses (-CHF 0.9 bn). changes in the shares of net income attributable to the different bank groups compared with the previous year. Domestically-oriented banks with a strong focus In 2018, 216 of the total 248 banks in Switzerland reported an annual profit (result on the interest-earning business, lost shares. The big banks recorded an increase for the period).23 Their aggregate annual profit amounted to CHF 12.8 bn and was from 48.3 percent to 50.1 percent. In contrast, the share attributable to the can- therefore CHF 2.5 bn higher than in the previous year (+24.0 %). The losses of the tonal banks fell from 13.6 percent to 13 percent. The shares attributable to the unprofitable banks increased by CHF 0.7 bn, from CHF 0.5 bn to CHF 1.3 bn. In foreign banks and «other banks» also declined, from 11.6 percent to 11.2 percent total, the aggregate result for the period across all banks increased by CHF 1.7 bn and from 18.3 percent to 17.9 percent respectively. There was only a minimal (+17.3 %) compared with the previous year and is now CHF 11.5 bn. The largest change in the shares attributable to the regional banks and savings banks, the share of the aggregate result for the period was reported by the big banks (CHF Raiffeisen banks and the private bankers. 4.9 bn), cantonal banks (CHF 2.9 bn) and the stock exchange banks (CHF 1.5 bn). The banks paid taxes amounting to CHF 1.5 bn. Compared with the previous year, this corresponds to a reduction of CHF 0.7 bn. One reason for this could be the

22 Since 2009, the share of net income attributable to the big banks has been between 46 and 51 percent, and is therefore substantially higher than the shares of the remaining bank groups. In order to better illustrate the trend for the remaining bank groups, the developments in the share of net income of the big 23 The result for the period is calculated on the basis of gross profit minus «depreciation of fixed assets», banks is not included in this figure. «write-downs, provisions and losses», «extraordinary expenses» and «taxes», plus «extraordinary income»

44 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 45 II Consolidated trend in Switzerland’s banks

lowering of the US corporate tax rate as part of the Tax Cuts and Jobs Act 2017 II. 1.2 Trends in the current year (TCJA), which makes profit shifting to Switzerland less attractive. The International Monetary Fund (IMF) revised its growth forecasts for the global Fig. 6 economy downwards for the third time this year. As at July, the IMF expects to see growth of 3.2 percent. In January, the forecast for 2019 was 3.5 percent. Among Derivation net income for the period of the banks in Switzerland other factors, the IMF explains this further correction as being related to the ongo- 2018, in CHF bn ing trade conflict between the US and China and the trade tariffs that have been 65,3 43,1 introduced. The uncertainties arising from Brexit, Italy’s economic and financial 23,5 22,5 situation and the geopolitical tensions in the Gulf region also had a dampening effect on the growth forecast.24

22,0 20,6 The slowdown of the global economy negatively impacts Switzerland’s foreign trade. Declining capacity utilisation combined with a high degree of uncertainty is slowing companies’ investments in their production capacities. For 2019, SECO 22,2 25 10,7 therefore expects to see moderate GDP growth of 1.2 percent. 8,2 11,5 11,6 The nomination of the head of the IMF, Christine Lagarde, to become Mario Draghi’s successor as President of the European Central Bank (ECB) would suggest Aggregated Business expense Gross profit Write-downs Annual profit net income losses Provisions Profit for that the ECB’s loose monetary policy is set to continue for some time. This puts Extraordinary net the period income Taxes pressure on the SNB’s monetary policy, which will likely remain expansionary for the time being. According to the SNB, negative interest rates and the willingness to Gross income interest rate Net income from trading Staff expenditure intervene in the foreign exchange market «remain essential».26 The SNB policy rate Net income from commission and services Other ordinary net income Material cost continues to be -0.75 percent. The SNB remains of the view that the franc is highly Source: SNB valued and that the situation in the foreign exchange market is still fragile.

Trends in the stock markets are running contrary to the global economic trend and the existing political uncertainties. In the first half of 2019, share prices recovered compared with the second half of 2018. The SMI crossed the 10,000-point mark for the first time in June 2019, and has risen by around 19 percent since the beginning of the year. One reason for the share price performance is the continued expansion- ary monetary policy which is likely to be further expanded. It remains to be seen how the positive trend in stock exchanges will impact income from trading in 2019.

24 International Monetary Fund (2019). World Economic Outlook. 25 State Secretariat for Economy (2019). The economic forecast of the Federal Government’s Expert Group. 26 Swiss National Bank (2019). Monetary policy status report of 21. March 2019.

46 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 47 II Consolidated trend in Switzerland’s banks

II. 2 Balance sheet business Fig. 7

Balance sheet totals by banking group In 2018, the aggregate balance sheet total of all the banks in Switzerland decreased slightly by 0.8 percent. The SNB’s currency interventions are impacting the break- Balance sheet total In bn CHF 2017 2018 Change Percentages 2018 down of assets at commercial banks. The banks’ sight deposits at the SNB remain Cantonal Banks 575.3 600.3 4.3 % 18.6 % at a very high level. Even after the introduction of negative interest rates and the Big banks 1,566.4 1,520.8 -2.9 % 47.2 % lifting of the minimum euro exchange rate, the banks in Switzerland continue to fulfil their role as lenders and financing partners to the full extent.27 Regional banks, savings banks 118.1 120.3 1.8 % 3.7 % Raiffeisen banks 225.3 225.3 0.0 % 7.0 %

II. 2.1 Trends in 2018 Foreign banks 324.6 313.5 -3.4 % 9.7 % Private bankers 6.2 6.3 2.0 % 0.2 % II. 2.1.1 Balance sheet trends Stock exchange banks 224.0 228.7 2.1 % 7.1 % Other banking institutions 209.5 209.7 0.1 % 6.5 % In 2018, the aggregate balance sheet total of all the banks in Switzerland decreased Total 3,249.4 3,225.0 -0.8 % 100.0 % from CHF 3,249.4 bn to CHF 3,225.0 bn (-0.8 %). With an increase in balance sheet Source: SNB total of CHF 25.0 bn, the cantonal banks reported the greatest year-on-year rise, followed by the stock exchange banks (+CHF 4.7 bn), the regional banks and Mortgage loans biggest asset items savings banks (+CHF 2.2 bn) and the «other banking institutions» (+CHF 0.3 bn). In 2018, domestic and foreign mortgage loans rose by CHF 36.6 bn (+3.7 %), from The private bankers (+CHF 0.1 bn) and Raiffeisen banks (+CHF 0.1 bn) also reported CHF 995.3 bn to CHF 1,031.8 bn compared with the previous year. Mortgage loans a slight increase. In contrast, a decrease was reported by the big banks (-CHF 45.7 bn) therefore remained the largest asset item for the banks in Switzerland in 2018, and foreign banks (-CHF 11.1 bn). accounting for a share of around 32.0 percent of total assets. The cantonal banks (+CHF 14.6 bn), the Raiffeisen banks (+CHF 7.5 bn) as well as the big banks (+CHF 6.6 bn) in particular reported an increase in mortgage loans. As in the previ- ous year, fixed interest rate mortgages accounted for around 80 percent of total domestic mortgage loans.

Customer loans decrease «Remaining loans» are reported in the balance sheet under amounts due from customers. Loans decreased in 2018 by CHF 24.7 bn (-3.9 %) to CHF 601.2 bn. Accounting for a share of 18.6 percent of total assets, customer loans were the second largest item. One reason for the decline was the CHF 31.4 bn decrease in the big banks’ loans to customers abroad. A very large share of this related to loans to intragroup companies. The volume of the corporate loans increased by 6.6 percent to CHF 530.8 bn. 83.2 percent of this is attributable to SMEs with 27 Institute of Financial Services (2017). Study on the financing of the SME in Switzerland 2016. fewer than 250 employees.

48 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 49 II Consolidated trend in Switzerland’s banks

Fig. 8 Reduction in in securities and precious metals in trading portfolios The item trading portfolios of securities and precious metals decreased by CHF Composition of the assets 22.1 bn (-11.2 %) to CHF 175.0 bn year-on-year. This decline is due to the negative in CHF bn developments in the stock market in 2018. The SMI Swiss benchmark index fell 3500 3,500 by 10.2 percent in 2018 and is thus representative of many key benchmark indices

3,000 3000 Fundamental changes in breakdown of assets since 2008 2500 2,500 There has been a significant change in the breakdown of assets in the last ten years. Liquid assets increased enormously between 2008 and 2018. While in 2,000 2000 2008, holdings were at CHF 128.0 bn, by the end of 2018, they amounted to 1500 1,500 CHF 509.7 bn. A number of factors contributed to this sharp rise: on the one hand, the SNB’s interventions to counteract the strong franc were a determining factor, 1000 1,000 because when selling foreign currencies, the SNB credits the sight deposit accounts 500 500 of the counterparty for the equivalent value in Swiss francs. In addition, due to the 0 0 low interest rates, the opportunity costs related to liquidity holdings were relatively 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 low, which is why the banks deposited high amounts of liquidity on the sight

Fiancial assets Receivables from banks deposit accounts held at the SNB. Despite the negative interest rates applied since Trading portfolios in securities and precious metals Receivables from securities financing transactions 2015, the banks increased their sight deposits at the SNB from around CHF 37.2 bn Other assets Receivables from customers Liquid assets Mortgage loans in 2008 to CHF 466.7 bn in 2018.

Source: SNB Domestic and foreign mortgage loans also rose continuously between 2008 and 2018 28 (+47.0 %, from CHF 701.9 bn to CHF 1,031.8 bn). Their share of total assets Liquid assets decrease slightly increased from 22.8 percent (as at year-end 2008) to 32.0 percent as at the end Liquid assets fell slightly compared with the previous year, by CHF 1.7 bn to of 2018. CHF 509.7 bn (-0.3 %). While domestic holdings increased by CHF 9.2 bn, foreign holdings decreased by CHF 10.9 bn. This development arose from the fact that the The reason for this is also the persistently low interest rates as well as the associated big banks increased their sight deposits at the SNB by CHF 10.1 bn while at the high demand for real estate. In 2008, loans to banks accounted for 26.7 percent same time reducing their sight deposits at foreign central banks by CHF 8.9 bn. of total assets. In 2018, their share was down to 7.5 percent (2008: CHF 822.0 bn, 2018: CHF 241.4 bn). Among other factors, this decrease is a result of the banks Increase in financial investments consciously reducing this balance sheet item in order to reduce their linkages with The balance sheet item financial investments increased by CHF 6.2 bn (+2.7 %) to other banks. This development is also attributable to the higher capital ratio CHF 231.9 bn compared to the previous year bn. As in the previous year, this was required by regulation. From 2008 to 2018, holdings in securities and precious due to an increase in domestic assets (CHF 6.6 bn). By contrast, foreign investments metals for trading purposes recorded a decline of 18.2 percent (2008: CHF 213.9 bn, fell slightly (CHF 0.4 bn), as did investments (CHF 0.8 bn).

28 With around 2 percent of total mortgage loans in 2018, foreign mortgage loans are negligible.

50 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 51 II Consolidated trend in Switzerland’s banks

2018: CHF 175.0 bn). Their share of total assets fell from 6.9 percent to 5.4 percent. Fig. 9 This continuous reduction reflects the ongoing strategic efforts of the banks to reduce their risk-weighted assets. Breakdown of liabilities in CHF bn

Liabilities: rise in liabilities in the form of customer deposits 3,500 In 2018, the balance sheet item amounts due in respect of customer deposits, 3,000 which comprises the items sight deposits, time deposits and other amounts due in respect of customer deposits, rose by CHF 26.7 bn (+1.5 %) to CHF 1,814.8 bn. 2,500 These liabilities in the form of customer deposits accounted for 56.3 percent of the 2,000 balance sheet total at the end of 2018. Sight deposits fell by CHF 9.4 bn (-1.1 %). Other amounts due in respect of customer deposits also declined, by CHF 3.0 bn 1,500

(-0.4 %). Time deposits, in contrast, rose by CHF 39.1 bn (+17.0 %). The balance 1,000 sheet item amounts due in respect of customer deposits saw the highest increase 500 at the cantonal banks and big banks. The cantonal banks reported a rise of

CHF 12.3 bn and the big banks an increase of CHF 15.5 bn. In the case of the big 0 banks, additional deposits of intragroup entities without banking licences made a 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

significant contribution to the rise. As in the previous year, liabilities to customers Own funds Time deposits abroad declined in 2018 (-CHF 3.7 bn), while liabilities to domestic customers Other liabilities Sight deposits Bond issues, central mortgage institution loans and cash bonds Liabilities from trading business increased (+CHF 30.3 bn). Other liabiliities from customer deposits Liabilities to banks

Source: SNB Liabilities to banks decrease Liabilities to banks fell by CHF 10.5 bn (-2.7 %) in 2018. This decrease is due to a reduction in liabilities to banks abroad of CHF 14.6 bn. Liabilities to domestic banks, Decline in liabilities from trading portfolios in contrast, rose further by CHF 4.1 bn. Trading portfolio liabilities decreased by CHF 1.1 bn (-3.1 %) to CHF 33.4 bn. Liabili- ties from trading portfolios comprise short positions related to the asset item «secu- Rise in equity capital rities and precious metals in trading portfolios». Since losses were realised in the In 2018, equity capital rose by CHF 1.7 bn (+0.8 %) to CHF 215.8 bn. Since 2015, markets in 2018, it can be concluded that the short positions also decreased in the equity capital is defined as the sum of a bank’s capital, statutory capital reserve, same period. statutory retained earnings reserve, voluntary retained earnings reserves, own shares (negative item) and profit / loss carried forward. Decline in «bond issues, central mortgage institution loans and cash bonds» The balance sheet item «bond issues, central mortgage institution loans and cash bonds» decreased by CHF 30.1 bn (-6.9 %). This decline is due to a fall in «bond issues and central mortgage institution loans» of CHF 29.0 bn. The reason for this is a decrease in the issuance by the big banks of money market instruments (-CHF 21.3 bn) and bonds (-CHF 19.4 bn) abroad. This could be attributable to

52 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 53 II Consolidated trend in Switzerland’s banks

expansionary monetary policy, among other things. Due to sufficient liquidity in the Non-banks are increasingly entering the mortgage loans business. Thus, for exam- market, money market instruments are becoming relatively less attractive. This ple, according to SNB, the mortgage origination through the pension funds was at balance sheet item increased in Switzerland (+CHF 11.8 bn) and applied mainly for 16.8 percent (2007). Mortgage loans by non-banks today are clearly above 5 per- the cantonal banks (+CHF 4.8 bn) and big banks (+CHF 3.7 bn) bank groups). cent of the overall market. At the same time, crowdfunding platforms raised around CHF 516.6 m in 2018. This corresponds to an increase of 38 percent compared with Breakdown of liabilities over time the previous year. The biggest growth drivers in this area were SME financings Before 2008, liabilities to banks accounted for the largest share of liabilities and through crowdlending and real estate investments through crowdinvesting.29 have declined continuously from that time onwards. Since 2008, the reduction has amounted to 42.8 percent or a decrease of CHF 284.2 bn to CHF 379.9 bn. This Fig. 10 shows that the interconnectedness between banks – in particular vis-à-vis banks in Switzerland – further decreased and the banks’ financing is solid. Sight deposits Domestic credit volume trends rose from CHF 381.5 bn to CHF 880.6 bn during that same period. Sight deposits as in CHF bn

a share of total liabilities rose from 12.4 percent in 2008 to 27.3 percent in 2018 871.0 902.7 920.7 953.9 1,000.3 1,045.4 1,072.5 1,076.5 1,107.5 1,131.1 1,174.7 and were therefore the biggest liabilities item at the end of 2018. At the same time, 1’200 65.5 66.8 66.0 99.1 the share of time deposits fell from 21.3 percent in 2008 to 8.4 percent in 2018. 72.0 61.2 89.6 1’000 68.6 92.2 69.0 99.6 90.5 1010.2 106.9 974.7 In the low interest rate environment, time deposits are less attractive than sight 62.4 949.3 96.8 924.7 62.8 66.9 900.9 62.5 93.7 869.8 deposits. This results in a shift from time deposits to sight deposits. 800 115.1 95.7 834.4 119.3 797.8 758.1 724.8 689.2 II. 2.1.2 Domestic credit business trend 600

400 The total outstanding domestic credit volume was CHF 1,174.7 bn in 2018. Of that

total, CHF 164.6 bn were secured and unsecured customer loans (companies, 200 public corporations and consumer credit), and CHF 1,010.2 bn was attributable to mortgage loans. Compared with the previous year, the total volume of credit in 0 2008 2009 2010 2 011 2012 2013 2014 2015 2016 2017 2018 Switzerland rose by 3.9 percent in 2018. Domestic mortgage lending growth, at 3.6 percent, was likewise higher than in the previous year (2017: +2.7 %). Mortgage Mortgage loans Uncovered loans Covered loans loans have increased by CHF 321.0 bn (+46.6 %) since 2008 and their share of the Source: SNB domestic credit volume has grown from 79.1 percent to 86.0 percent. Mortgage loans therefore continue to account for the largest share of credit volume. Un­se- cured loans also increased year-on-year (+10.6 %), while secured loans fell (-2.0 %).

29 Institute of Financial Services Zug (2019). Crowdfunding Monitoring – Switzerland 2019.

54 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 55 II Consolidated trend in Switzerland’s banks

Three-quarters of total mortgage loans attributable to private households Fig. 11 in 2008 Total outstanding mortgage loans rose by 3.7 percent to CHF 1,031.8 bn in 2018. A Market share of domestic mortgage lending 2018 large majority thereof (CHF 1,010.2 bn) is attributable to customers in Switzerland. Cantonal banks 36.7 % 75 percent of these were mortgages granted to private households. Fixed-rate mortgages accounted for a 78.3 percent share of outstanding mortgages in 2018. Big banks 26.4 % The average interest rate for outstanding domestic mortgage loans decreased in 2018, from 1.53 percent to 1.45 percent 30. A look at the historical trend shows that Raiffeisen banks 17.8 % mortgage loans with a term upwards of five years have increased. While their share accounted for only 12.4 percent in 2008, it amounted to 24.7 percent in 2018. Regional banks, 9.6 % savings banks

Cantonal banks have largest share of the domestic mortgage market Remaining banks 9.5 % The cantonal banks’ market share of domestic mortgage lending volumes was 36.7

percent at the end of 2018. They were followed by the big banks, with a share of 0 % 40 % 26.4 percent (see Figure 11). Over the last few years, the share of market for Source: SNB domestic mortgage lending has grown to a lesser extent in particular at the big banks and the regional banks and savings banks, while the other banks, led by the Raiffeisen and cantonal banks, have gained market share. First mortgages clearly strongest lending group Broken down by lending groups, the share of first mortgages in Switzerland in 2018 was 92.6 percent. This lending group comprises mortgage loans of up to two-thirds of the market value of the respective property. This figure remained unchanged compared with the previous year. There are no relevant identifiable differences between the various bank groups in this segment. The high proportion of first mortgages likely reflects that on the one hand, mortgages are being granted with caution and that on the other hand, mortgages in the second lending group are being amortised faster.

According to the SNB’s Financial Stability Report, the banks with a domestic focus are standing on a solid foundation. In recent years, the banks’ eligible capital has grown substantially faster than risk-weighted assets. This has resulted in risk- weighted capital ratios that are significantly above the minimum regulatory requirements.31

30 Meanwhile, institutional clients are even offered negative interest mortgage. 31 sws National Bank (2019). Report on Financial Stability 2019.

56 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 57 II Consolidated trend in Switzerland’s banks

Declining demand for consumer credits Liabilities: rise in amounts due Consumer credit continues to be of relatively negligible importance in Switzerland. On the liabilities side, amounts due in respect of customer deposits rose by In total, there were 565,835 loans with a volume of CHF 7.8 bn outstanding at the CHF 40.2 bn (+2.2 %). Sight deposits increased by CHF 19.5 bn (+2.2 %). The rise in end of 2018. Compared with the previous year, this corresponds to a decrease in sight deposits is higher than in the previous year, when sight deposits increased by volume of 6.8 percent. CHF 7.8 bn (+0.8 %) for the period. In the first five months, time deposits rose by CHF 7.2 bn (+2.6 %) and therefore to a lesser extent than in the first five months of II. 2.2 Trends in 2019 the previous year (CHF 18.7 bn or +8.0 %). Liabilities from trading portfolios increased significantly by CHF 12.1 bn (+36.3 %). The item trading portfolio liabilities Rise in balance sheet total comprises short positions related to the trading business. This is an indication that The aggregate balance sheet total of the banks in Switzerland rose by CHF 95.0 bn investors expected to see a decline in share prices. (+2.8 %) in the first five months of 2019 (December 2018: CHF 3,377.0 bn to May 2019: CHF 3,472.0 bn).32 The negative trend seen in 2018 did not, therefore, con- Liabilities from securities financing transactions also rose, by CHF 10.9 bn (+8.6 %). tinue and the balance sheet totals of the banks to date exceed last year’s level. The items bond issues, central mortgage institution loans and cash bonds increased only slightly by CHF 6.2 bn (+1.5 %). Liabilities to other banks rose by CHF 2.1 bn Assets: rises in loan amounts, trading portfolio assets and financial (+0.5 %) and equity capital increased by CHF 2.1 bn (+1.0 %). investments Over the period from January until May, the balance sheet item amounts due from Moderate rise in the provision of mortgage loans securities financing transactions rose by CHF 31.0 bn (+14.7 %) and trading portfolio Mortgage lending grew continuously in the first five months of the year, rising by assets increased by CHF 10.7 bn (+ 6.2 %). This suggests that the banks grew their CHF 15.3 bn (+1.5 %) to CHF 1,021.0 bn. Secured and unsecured loans also positions in money market and debt instruments in the first half of the year and increased, by CHF 2.3 bn (+3.4 %) and CHF 2.7 bn (+2.7 %) respectively. According increasingly built up amounts due from reverse repurchase transactions. Customer to SECO, both the propensity of Swiss companies to invest and building permits are loans and mortgage loans also increased, by CHF 19.6 bn (+3.2 %) and CHF 15.6 bn on the decline in Switzerland.33 However, the possibility of a further loosening of (+1.5 %) respectively. Loans to other banks rose by CHF 6.4 bn (+2.3 %) and finan- monetary policy could change this. It therefore remains to be seen how lending will cial investments by CHF 1.5 bn (+0.6 %). By contrast, liquid assets declined slightly develop in the course of the year. by CHF 2.8 bn (-0.5 %).

32 The monthly figures are based on sample surveys conducted by the SNB and can therefore deviate from the year-end statistics, which are based on a full survey. 33 State Secretariat for Economic Affairs (2019). Konjunkturtendenzen Sommer 2019.

58 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 59 II Consolidated trend in Switzerland’s banks

II. 3 Assets under management Fig. 12

The banks in Switzerland managed total assets of CHF 6,943.5 bn at the end of Assets under management in Switzerland by customer origin* 2018. Compared with the previous year, assets under management decreased by in CHF bn

CHF 348.4 bn (-4.8 %). The relative share of foreign customer assets remained 5,408 (2008) 5,475 (2010) 5,795 (2012) 6,656 (2014) 6,650 (2016) 6,943 (2018) almost unchanged at 47.5 percent. Switzerland remains the global market leader 8,000 for cross-border private banking: over one-quarter (market share: around 27 %) 7,000 34 of global cross-border assets are managed in Switzerland. 6,000

5,000 II. 3.1 Trends in 2018 4,000

The banks in Switzerland managed total assets of CHF 6,943.5 bn at the end of 3,000

2018. Compared with the previous year, assets under management fell by 2,000 CHF 348.4 bn (-4.8 %). This decline is reflected both in foreign (-6.4 %) as well as 1,000 domestic customer assets (-3.3 %). Assets under management consist of securities holdings in customer custody accounts (2018: CHF 5,849.3 bn), liabilities to custom- 0 2008 2009 2010 2 011 2012 2013 2014 2015 2016 2017 2018 ers excluding sight deposits (2018: CHF 934.1 bn), as well as fiduciary liabilities (2018: CHF 160.0 bn). Foreign Domestic

* Starting in the reporting month November 2015, the SNB for the first time conducted surveys according to the revised accounting rules for banks (ARB) of the Swiss Financial Market Supervisory Authority FINMA (ARB, FINMA Circular 15 / 01, formerly FINMA Circular 08 / 02). The ARB results in changes to the classification and content of the balance sheets and the income statements of the banks. As a result of the amendments, «assets under management» are now reported differently. The amended reporting of the items from 2006 until 2014 can result in discrepancies in the amounts reported to date.

Source: SNB

There was a sharp drop in assets under management immediately following the outbreak of the financial and economic crisis in 2008. Securities holdings in cus- tomer custody accounts at the banks in particular suffered substantial losses due to the sharp drop in stock market indices. Subsequent to this, assets under manage- ment rose successively by CHF 1,883.4 bn (+34.8 %) to CHF 7,291.8 bn in 2017.

In 2018, assets under management decreased compared with the previous year. This decline is attributable to the lower securities holdings in customer custody 34 A detailed analysis of assets under management in Switzerland according to customer segment and type accounts (-6.5 %). One of the reasons for this decrease may be a valuation effect. of management can be found in Part III: Developments in selected areas of business.

60 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 61 II Consolidated trend in Switzerland’s banks

In 2018, for example, the MSCI World Index fell by 8.7 per cent. By contrast, liabili- Fig. 13 ties to customers excluding sight deposits (+4.0 %) as well as fiduciary liabilities (+15.8 %) rose against the previous year. Because securities holdings account for by Secutities holding in customer custody accounts by type far the largest share of assets under management, the decline in securities holdings in CHF bn

dominates. 4,012.3 4,510.2 4,456.0 4,240.1 4,842.5 5,170.0 5,644.9 5,587.9 5,654.1 6,255.5 5,849.3 7’000

The share of assets attributable to foreign customers fell from 55.7 percent to 47.5 6’000 270.6 percent between 2008 and 2018. The decline in the share of assets held by foreign 2,198.1 258.7 253.0 271.0 227.1 2,125.7 1,803.5 1,851.1 1,919.7 customers is the result of a number of factors. One is the currency effect. Foreign 5’000 255.7 customers hold a significantly higher portion of their assets in euro and dollars than 269.9 1,555.2 343.5 332.7 1,439.2 4’000 278.2 1,304.6 1,330.3 domestic customers. The shares of assets are calculated in Swiss francs. If the franc 391.8 1,272.0 2,492.1 1,199.2 appreciates against other currencies, the assets of foreign customers automatically 2,256.8 2,238.4 2,205.7 2,199.4 3’000 2,081.3 1,768.6 fall in relation to those of domestic customers. There has been only a slight change 1,527.7 1,539.8 1,458.5 1,220.4 in the share of assets attributable to foreign customers since Switzerland committed 2’000 to the AEOI in 2013.35 1,334.4 1,364.8 1’000 1,200.8 1,253.2 1,231.5 1,277.7 1,313.6 1,271.3 1,275.7 1,294.8 1,265.4 Decrease in securities holdings 0 Securities holdings in customer custody accounts fell by CHF 406.2 bn (-6.5 %) to 2008 2009 2010 2 011 2012 2013 2014 2015 2016 2017 2018 CHF 5,849.3 bn. Securities holdings are broken down into the categories equities Bonds Collective capital (37.6 %), collective capital investments (36.3 %), bonds (21.6 %) and «other» Equities Other (4.4 %). Positions in all of these categories decreased compared with the previous year. Equities saw the largest decline (-11.7 %), followed by «other» (-4.4 %), Source: SNB collective capital investments (-3.3 %) and bonds (-2.3 %). Swiss franc-denominated securities holdings fell by CHF 207.7 bn (-6.8 %). This was followed by securities Significant decrease in equity holdings held in euros (-CHF 121.3 bn or -14 %) and dollars (-CHF 42.7 bn or -2.7 %). Equity holdings in customer custody accounts at the banks fell by 11.7 percent compared with the previous year. At the end of 2018, equity holdings amounted to CHF 2,199.4 bn. Accounting for a share of around 37.6 percent, equities were the largest position in terms of securities holdings.

Decline in demand for collective capital investments Accounting for a 36.3 percent share, collective capital investments, consisting primarily of investment funds, were the second-largest securities category. They also decreased in 2018, by 3.3 percent to CHF 2,125.5 bn.

35 For a detailed analysis of asset development since 2013, see Part III.

62 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 63 II Consolidated trend in Switzerland’s banks

Decrease in bond holdings Slight fall in savings and investment liabilities Bond holdings fell by 2.3 percent to CHF 1,265.4 bn in 2018. Bonds were the Savings and investment liabilities to customers amounted to CHF 664.7 bn at the third-largest asset class in customer custody accounts, accounting for a share of end of 2018, which corresponds with a reduction of 0.4 percent compared to the 21.6 percent thereof. previous year. A total of 89.6 percent of customer savings and investment deposits were attributable to domestic customers in 2018. These assets include vested Decrease in «other» securities holdings benefits accounts (Second Pillar) and assets related to the tied pension provision «Other» securities holdings decreased by 4.4 percent in 2018 (Third Pillar). to 258.7 bn and accounted for 4.4 percent of customer custody accounts. Fiduciary deposits rise once again Fig. 14 The fiduciary deposits managed by the banks in Switzerland increased by CHF 21.8 bn to CHF 160.0 bn (+16.0 %) in 2018. The majority of inflows (82.7 %) Deposits by currency at the end of 2018 originated from abroad. This marks a renewed increase in fiduciary deposits. In 2008, fiduciary deposits under management amounted to CHF 382.4 bn. They

CHF 51.1 % declined continuously until 2015, when they reached CHF 114.0 bn. At 2.3 percent of total assets under management, fiduciary deposits have only a negligible impact on private banking in Switzerland. USD 26.8 %

II. 3.2 Trends in 2019

EUR 14.8 % At the end of May 2019, the banks in Switzerland managed total assets of CHF 7,426.1 bn, which represents an increase of CHF 528.5 bn (+7.7 %) compared Other 7.3 % with December 2018 (December 2018: CHF 6,897.6 bn) and exceeds the record high achieved after the financial crisis at the end of 2017 (December 2017: 0 % 60 % CHF 7,291.8 bn).36 This increase is due to a rise in securities holdings of CHF 491.2 bn Source: SNB (+8.5 %), from CHF 5,785.9 bn to CHF 6,277.1 bn. Liabilities to customers excluding sight deposits increased during the same period by CHF 20.6 bn (+2.2 %) to

Dollar-denominated investments rise, euro-denominated investments fall CHF 969.9 bn. Fiduciary liabilities also rose, by CHF 16.7 bn (+10.3 %) to The importance of the euro as an investment currency declined slightly in 2018. The CHF 179.2 bn. One possible reason for this trend is the fact that the equity markets share of euro-denominated investments decreased from 15.8 percent to 14.8 recovered significantly in the first half of 2019 compared with the second half of percent of total securities holdings in 2018. However, deposits in US dollars sank in 2018 and have since returned to a similar level as prior to the slump which began at absolute terms compared with the previous year (-2.7 percent), although their share the end of September 2018. of total deposits increased from 25.7 percent to 26.8 percent. At 51.1 percent, the Swiss franc continued to be by far the most important investment currency.

36 The monthly figures are based on sample surveys conducted by the SNB and can therefore deviate from the year-end statistics, which are based on a full survey.

64 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 65 II Consolidated trend in Switzerland’s banks

II. 4 Employment at Switzerland’s banks The trend towards consolidation in the banking sector has been ongoing for many years. The low interest rate environment, the stricter rules for lending and the new At the end of 2018, the banks in Switzerland employed 90,660 people (in full-time capital requirements are putting pressure on margins. The outsourcing and digitali- equivalents, in Switzerland), which corresponds to a decrease of 1.3 percent com- sation of business processes make it possible to reduce labour costs and increase pared to the previous year. At 2.3 percent, the unemployment rate in the banking the efficiency of processes. industry was significantly lower than that of the overall economy. Fig. 15 According to a survey conducted by the SBA, the employment trend in the first half of 2019 declined slightly. Around 60 percent of the banks surveyed expect the Staff levels at the banks in Switzerland (domestic) employment situation to remain flat in the second half of 2019. in thousands full-time equivalents

110.1 107.5 108.0 108.1 105.2 105.8 104.1 103.0 101.4 91.9 * 90.7 II. 4.1 Trends in 2018 120.0

3.2 4.0 3.3 3.5 3.6 4.0 4.0 4.1 3,5 7. 0 In 2018, the banks employed 90,660 people in Switzerland (in full-time equiva- 100.0 4.8 7.1 7. 9 4,2 7. 8 7, 8 4.9 4.8 4.8 4.0 7.7 4,2 3.9 8.1 7, 8 lents), of which around 23,000 were employed in private banking (see Chapter III 8.0 8.2 4.2 0,6 3.8 3.8 8,2 8.4 0,6 0,5 7.7 37 9.4 8.3 8.8 8.9 7.7 2.7). The number of jobs fell by 1,240 jobs (-1.3 %) against the previous year. As 9.2 9.1 9.6 8,6 12.6 3.9 80.0 9.3 0,5 3.9 21.6 12.5 12.9 0.5 in the previous year, part of this decrease can be explained by the fact that jobs 20.9 21.2 9.1 9.2 20.7 19,8 18.5 18.3 were transferred to intragroup entities that are not included in the banking 16.2 13.4 13.7 15.6 statistics. 60.0 16.9 17.3 17.4 17.4 17,4 15.1 17.2 14.2 17.1 17.3 17.3

According to SECO, the average unemployment rate in the Swiss banking sector 40.0 42.5 17.3 17.3 40.0 39.9 39.7 39,3 was 2.3 percent in December 2018. It was thus 0.4 percentage points below the 37.3 36.1 35.8 34.5 figure for the overall economy, which was 2.7 percent, and is therefore compara- 24.9 24.1 tively low. Overall, an annual average of 3,418 people were registered as unem- 20.0 ployed in the banking sector in 2018, which corresponds to a reduction of 581 38 compared to 2017. Considering the major challenges faced by banks, the labour 0.0 market continues to be highly robust. 2008 2009 2010 2 011 2012 2013 2014 2015 2016 2017 2018

Big banks Stock exchange banks Regional banks, savings banks Cantonal banks Raiffeisen banks Other banks Foreign banks Private bankers

* This reflects a one-off effect caused by a big bank’s transfer of employees to an intragroup service company. The domestic staff levels for 2017 were corrected by the SNB on 27.06.2019 due to a retroactive correction from 93,554 to 91,900 made by a reporting bank.

Source: SNB 37 The domestic staff levels for 2017 were corrected by the SNB on 27.06.2019 due to a retroactive correction from 93,554 to 91,900 made by a reporting bank. 38 State Secretariat for Economic Affairs (2019). Die Lage auf dem Arbeitsmarkt.

66 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 67 II Consolidated trend in Switzerland’s banks

Cuts at foreign banks and big banks II. 4.2 Trends in 2019 The big banks, foreign banks, «other banking institutions» and private bankers cut 1,775 jobs in 2018. The foreign banks accounted for the greatest decline in staff The annual SBA survey on employment trends at the banks shows a slight rise in levels, with a reduction of 878 (-5.8 %) jobs. The big banks reduced their staff the employment figures for Switzerland for the first half of 2019. The number of levels by 813 jobs (-3.3 %). Conversely, the cantonal banks, regional banks and jobs increased from 87,596 to 87,617 between the end of 2018 and June 2019. savings banks, Raiffeisen banks and stock exchange banks created 535 additional Compared to the end of 2018, 21 jobs were added in Switzerland, which is an jobs in 2018. The strongest growth was reported by the stock exchange banks with additional 0.02 percent. In contrast, staff levels abroad declined during this period, 292 jobs (+2.2 %), and the Raiffeisen banks with 136 jobs (+1.5 %). Staff levels namely by minus 0.25 percent or 212 jobs. increased by 47 (+0.3 %) new jobs at the cantonal banks and by 60 (+1.6 %) at the regional banks and savings banks. One reason for this was the decline in staff Fig. 16 levels. Employees Domestic total*

Full-time As at As at Rise in the number of female employees equivalents 31. 12. 2018 30. 06. 2019 Trends in the first half of 2019

The number of gainfully employed fell from 16,800 to 16,330 (-2.8 %) in the 15 to Total change Change in % Joined Left

24-year-old segment. A slight increase from 48,000 to 48,230 (+0.5 %) was Domestic 87,596 87,617 21 0.02 % 4,922 4,901 reported for the 25 to 39-year-old segment. The 40 to 54-year-old segment also saw an increase, from 49,400 to 52,120 (+5.6 %). For the 55 to 64-year-old seg- NB: Number of responses: 153

ment, the number of employed persons decreased from 15,600 to 15,320 * Staff levels in Switzerland at the end of 2018 were lower according to the SBA survey than to the SNB (-1.7 %).39 statistics. The reason for this disparity is the response rate to the SBA survey. 215 banks in Switzerland were surveyed. The response rate was 71 percent, which represents 96.6 percent of staff levels at the banks in Switzerland. At the end of 2018, Swiss banks employed 34,421 women in Switzerland (full-time Source: SBA employment survey (2019) equivalents). The share of female employees once again increased slightly compared to the previous year, from 37.5 percent to 39.5 percent. As in previous years, the regional banks and savings banks, and the Raiffeisen banks reported the highest The detailed results regarding incoming and outgoing staff show that there were share of female employees at 44.9 percent and 44.8 percent respectively. 4,922 incoming domestic employees at the banks in Switzerland in the first six months of the year. 4,901 outgoing employees were reported for the same period, which resulted in a slight rise in staff levels of 0.02 percent.

Expectation of flat employment trend broadly shared 59.2 percent of the banks surveyed expect employment levels to remain unchanged in the second half of 2019, which corresponds to a decrease of 2.1 percentage points compared to the previous year’s survey. 25.7 percent of survey participants expect staff levels to rise in Switzerland and 15.1 percent expect to see lower levels. The bank representatives surveyed were therefore substantially more cautious with regard to domestic employment trends than one year ago. Because those survey 39 Federal Statistical Office (2019). Swiss Labour Force Survey (SLFS).

68 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 69 II Consolidated trend in Switzerland’s banks

participants who expect no change or higher employment levels represent a share Fig. 18 of approximately 85 percent of total employment, the trend for overall employment is expected to be at least flat for the second half of 2019. Survey results regarding employment expectations for second half of 2019 Shares as a percentage of all responses

Fig. 17 100 % 30.0 23.2 17.5 14.7 18.5 19.1 21.0 24.7 32.1 25.7 90 % Expected employment trend in the second half 2019 80 % 66.5 65.5 66.1 69.8 67.3 68.1 70 % 63.9 59.2 61.1 61.3 60 %

50 %

40 %

Total 30 % 100 % 20 % 17.0 18.8 10 % 15.4 15,1 11.1 11.7 11.4 8.8 8.7 6.6 higher | 25.7 % 0 % lower | 15.1 % 2010 2 011 2012 2013 2014 2015 2016 2017 2018 2019 roughly the same | 59.2 % lower about the same higher

Note: Number of responses: 152. Shares as percentage of all responses. NB: Number of responses: between 90 and 105 depending on business activity. For «total», the number of responses is 152. Because the number of responses for «total» is much higher than those for the individual Source: SBA survey (2019) business activities, the significance of «total» is strongest. Trends are derived from the responses weighted by numbers employed in Switzerland as at June 2019.

Increase in expectation of lower employment Source: SBA survey (2019) In past surveys on employment trends, the «about the same» category has always dominated. However, since 2013, expectations of lower employment have been Employment expectations unchanged for almost all business areas decreasing, while expectations of higher employment have been rising. For the A comparison of the statements regarding trends for the individual business areas second half of 2019, however, the banks were somewhat less optimistic. The share weighted by the corresponding employment levels of the banks at the end of June of responses from banks that expected a lower employment trend increased. This 2019 indicates that the expectation that the employment trend will remain share more than doubled compared to the previous year. unchanged for all business segments dominated.40 Nevertheless, several differences can be inferred with regard to the expectations for the future. For example, over 95 The share of banks that expect to see higher employment levels in the second half percent of the banks surveyed expect the employment trend to remain flat for of 2019 fell from around one-third to around one-quarter. institutional asset management and the trading business. For private banking,

40 The Employers Association of Banks in Switzerland regularly publishes the latest employment figures in its «Bankenmonitor online». Due to the different methods for analysing the results and the varying time horizons under review, the results of the study by the Employers Association and those of the SBA survey may differ.

70 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 71 II Consolidated trend in Switzerland’s banks

however, around 15 percent of the banks surveyed expect to see an increase in staff in the second half of 2019 and only one percent expect to see a decrease. For retail banking, positive expectations (10 %) and negative expectations (7 %) are more or less balanced. For logistics and operations, around 20 percent of the banks surveyed expect to see employment fall in the second half of 2019.

Fig. 19

Employment trend in the second half of 2019

Retail Private Institutional asset Trading Logistics and operations Total Banking banking management business (back office)

Ú Ú (Þ) Ú Þ Ú Ú Ú à

NB: Number of responses: between 90 and 105 depending on business activity. For «total», the number of responses is 152. Because the number of responses for «total» is much higher than those for the individual business activities, the significance of «total» is strongest. Trends are derived from the responses weighted by numbers employed in Switzerland as at June 2019. Source: SBA survey (2019)

Stable unemployment rate for the banking sector According to the monthly statistics of the State Secretariat for Economic Affairs (SECO), the unemployment rate in the banking sector in the first half of 2019 was unchanged compared with December 2018 and remained at 2.3 percent. The unemployment rate was therefore slightly above the overall average for Switzerland, which was 2.1 percent in June.

72 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 73 III Developments in selected areas of business

III. Developments in selected III. 1 Overview of assets and investments under management Banks in Switzerland had a total of CHF 6.9 tn of assets under management at areas of business the end of 2018.41 Domestic private customers with assets of up to CHF 0.5 m accounted for CHF 0.2 tn of this sum.42 A further CHF 1.1 tn of this figure comprises Banks in Switzerland operate in various areas of busi- domestic customers with larger volumes of assets. In total, CHF 2.3 tn is managed ness, which have developed in different ways. Of the in the cross-border wealth management business. Private customers in Switzerland and abroad hold 53 percent of total assets at banks in Switzerland. The other 47 CHF 3.7 tn of private assets under management at the percent of total assets under management amount to CHF 3.3 tn and are held by end of 2018, CHF 2.3 tn came from customers domiciled companies and institutional clients. The CHF 6.9 tn consists of CHF 1.1 tn of bank abroad. Assets in cross-border wealth management rose deposits and CHF 5.8 tn of securities. by a total of CHF 300 bn compared to 2013. Investment management conducted in Switzerland amounts to a total of CHF 3.3 trillion in assets. Around 20 percent of investments managed in the Swiss investment manage- ment industry are sustainably invested, in contrast to a global average of 11 per cent.

41 Swiss National Bank (2019). Banks in Switzerland 2018. This total comprises professionally managed assets as well as assets deposited with banks. 42 Boston Consulting Group (2019). Global Wealth 2019: Reigniting Radical Growth. The information on asset segments was all provided by BCG.

74 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 75 III Developments in selected areas of business

Fig. 20 Fig. 21

Segmentation of assets by beneficial owner 2018 Investment management at the Swiss financial centre 2018

Companies and Domestic private Cross-border institutional customers assets over CHF 0.5 m wealth management + CHF 3.3 tn Management Domestic private + CHF 1.1 tn + CHF 2.3 tn Collective capital investments mandates assets up to CHF 0.5 m in line with Swiss law (non-institutional) CHF 0.2 tn Total domestic private assets Total private assets Assets under management Foreign collective Advisory CHF 1.4 tn (= wealth management) in Switzerland capital investments managed in mandates CHF 3.7 tn CHF 6.9 tn Switzerland (institutional)

Management Advisory mandates (institutional) mandates (non-institutional)

Note: Indicative representation, deviations due to rounding differences According to the Swiss National Bank + CHF 1.2 tn (SNB), total assets at Swiss banks amount to CHF 6.9 tn. The breakdown of assets by customer segment is based on BCG figures.43

Source: SNB, BCG, IFZ/AMP, SBA Asset management CHF 2.2 tn

Investment Some of the assets in this country are managed via investment solutions created management) CHF 3.3 tn in Switzerland. A total of CHF 3.3 tn of assets is managed in the Swiss investment management industry. Collective investments under Swiss and foreign law as well Note: Indicative representation, deviations due to rounding differences A total of CHF 3.3 tn of assets is as the discretionary mandates of institutional clients account for CHF 2.2 tn of this managed in the Swiss investment management industry. Collective investments under Swiss and foreign law as well as the discretionary mandates of institutional clients account for CHF 2.2 tn of this sum. A further sum. A further CHF 1.2 tn are managed in the form of discretionary mandates of CHF 1.2 tn are managed in the form of discretionary mandates of non-institutional clients as well as advisory non-institutional clients as well as advisory mandates. mandates. Source: SNB, BCG, IFZ/AMP, SBA

The breakdown of assets reveals a closely interconnected financial centre. The vari- ous customer segments benefit significantly from the combined expertise of invest- ment management. At the same time, the assets held by private customers drive strong demand for investment expertise. Overall, this creates advantages for both sides of the market. The labour market, in which experts can move between the 43 BCG has published the Global Wealth Report annually since 2001. The study aims to determine the volume https://www.bcg.com/ of private financial assets in 97 countries and to forecast how it will develop in the future. It also sets out various functions, plays an important role in promoting the exchange of knowledge publications/2019/glob- the implications and trends for wealth managers. The study is based on publicly accessible data sources, and fostering mutual understanding between market participants. al-wealth-reigniting-radi- BCG models and experts, as well as a survey of 150 wealth managers globally. BCG has kindly provided the cal-growth.aspx SBA with detailed data for this year’s Banking Barometer. The full Global Wealth Report 2019 is available at: www.bcg.com.

76 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 77 III Developments in selected areas of business

Fig. 22 III. 2 Swiss wealth management

The Swiss financial centre is tightly interconnected (2018) Wealth management – i.e. the management of private assets – is the Swiss finan- cial centre’s leading area of expertise. It encompasses the provision of comprehen- sive financial services for private individuals and the management of their assets. In 2018, banks in Switzerland managed a total of CHF 3.7 tn of private assets, of which around 62 percent originated from customers domiciled abroad. Wealth management is thus one of the most important services exported by Switzerland.

The domestic wealth management market benefits from the constant accumulation of wealth by the Swiss population and from assets brought by immigrants. Accord- Domestic private Total private assets up to CHF 0.5 m assets ing to BCG, Switzerland has the highest density of asset millionaires in the world, CHF 0.2 tn CHF 3.7 tn Total domestic private assets amounting to 7.5 percent of the domestic population. By 2023, a further 10,300 CHF 1.4 tn Assets at banks in Switzerland people should exceed this threshold according to BCG forecasts, representing the CHF 6.9 tn fifth-strongest growth rate in an international comparison.

Asset management CHF 2.2 tn Fig. 23

Investment Switzerland has the highest density of millionaires globally management CHF 3.3 tn Proportion of the adult population with assets exceeding CHF 1 m, selected countries, in percent, 2018 Note: Indicative representation, deviations due to rounding differences. The assets held at banks in Switzerland are partly managed by the Swiss investment management industry and partly by customers themselves or by foreign providers. The Swiss investment management industry additionally manages assets held at banks Switzerland 7.5 % abroad. USA 5.9 %

Hong Kong 3.6 % Source: SNB, BCG, IFZ/AMP, SBA Netherlands 1.6 %

Australia 1.4 %

In addition to the assets booked with commercial banks, the SNB holds CHF 816 bn Canada 1.4 %

of financial investments – mainly in foreign currencies and foreign investments. Belgium 1.4 %

However, they are not located at commercial banks but instead at foreign central Sweden 1.4 %

banks as well as the Bank for International Settlements (BIS). Consequently, the SNB Taiwan 1.3 % assets do not appear in the statistics on banks in Switzerland and are not consid- United Kingdom 1.1 %

ered in this publication. The SNB’s expertise in the field of investment management 0 % 8 % nevertheless makes a further contribution to investment expertise in Switzerland. Source: BCG

78 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 79 III Developments in selected areas of business

A total of CHF 1.4 tn of domestic private assets are managed in Switzerland (see Fig. 24). The high-net-worth individuals (HNWI) segment accounts for around 42 Typical customer segmentation by asset volume in the private customer percent of these assets, while a further 28 percent comes from the ultra-high-net- segment: worth individuals (UHNWI) segment. Even if the number of customers within the Up to CHF 100,000: Retail affluent, mass affluent and retail segments is significantly higher, cumulatively they CHF 100,000 – 1 m: Mass affluent / affluent account for only just under 30 percent of private wealth across the whole of Swit- CHF 1 m – 20 m: HNWI (high-net-worth individuals) zerland. Banks typically segment their customers according to asset volume and Over CHF 20 m: UHNWI (ultra-high-net-worth individuals) sometimes other criteria (see box on page 81). Note: Customer segmentation varies from bank to bank. In some cases, crite- Fig. 24 ria (e. g. advisory form chosen, family environment, mortgages) are considered Assets under management of domestic private customers 2018 in addition to asset volume. According to segment, investable assets (cash, bank deposits, securities)

UHNWI (389 bn.) HNWI (581 bn.) Affluent (169 bn.)

CHF 0.5–1 m

Mass affluent (181 bn.) CHF 1.000+ m

CHF 1–5 m CHF 0,1– 0,5 m

CHF CHF 100 –1.000 m 20 –100 m CHF 5–20 m Retail (53 bn.) CHF 0– 0,1 m

UHNWI (389 bn.) Retail (53 bn.) Mass affluent (181 bn.) Affluent (169 bn.) HNWI (581 bn.)

Source: BCG

80 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 81 III Developments in selected areas of business

III. 2.1 New regulations require the adaptation of business models Fig. 25

Important regulatory changes in wealth management Switzerland is the leading centre for cross-border wealth management globally. With a total of CHF 2,300 bn of foreign private assets, Switzerland’s cross-bor- Year Business area Notes der business is as large as the cumulative volume of the two financial centres that 2012 Swiss Federal Supreme Retrocessions (i.e. commission paid for distributing financial Court ruling on retroces- products) must essentially be passed on to customers. Numerous rank behind it in terms of size: Singapore and Hong Kong. The complexity of the sions banks have responded to this decision by introducing retroces- cross-border wealth management business is not only due to specialist financial sion-free mandates and by charging advisory fees with a view to ensuring a transparent fee system for wealth management requirements but also to a series of regulations that differ depending on the cus- services.

tomer’s domicile. The regulatory landscape for banks has altered significantly since 2014 FATCA The Foreign Account Tax Compliance Act (FATCA) is designed to the 2008 financial crisis. Fig. 25 provides an overview of the most important reg- ensure that all foreign bank accounts held by persons liable for taxation in the US can be taxed. The Swiss FATCA law allows for ulatory developments. Regulatory changes created the need for significant adjust- the easier implementation of FATCA for US persons by Swiss ments to bank business models – especially in cross-border wealth management. financial institutions. Financial institutions are confronted with much stricter requirements regarding their 2017 Automatic Exchange of The AEOI is an international standard governing the way in which Information (AEOI) the tax authorities of participating countries exchange information transparency vis-a-vis customers and their compliance with tax obligations, resulting about the accounts and custody accounts of persons who are in significantly higher internal compliance costs. At the same time, the new com- liable for taxation, with the aim of preventing tax evasion. For the individuals concerned, this means that banking confidentiality is patibility of Swiss regulations with international standards as a result of regulatory waived vis-à-vis the tax authorities in their country of domicile.

adjustments should lay the foundations for improved access to foreign markets – 2018 MiFID II This is the EU directive that is designed to improve financial especially in the European Union. stability and investor protection. It also aims to increase market efficiency and competition. It mainly affects the cross-border business with EU customers. The Swiss Federal Supreme Court’s ruling on retrocessions, as well as the Swiss 2019 Swiss-US DTT In July 2019, the US Senate approved the protocol to amend the Financial Services Act (FIDLEG), affect all areas of wealth management – not solely double tax treaty (DTT) between Switzerland and the US. This the cross-border business. Financial institutions must therefore adapt their business means that the exchange of tax information between the two countries upon request has been introduced in accordance with models accordingly, a process that has already largely been completed. the international standard. The protocol for the amendment of the DTT will formally enter into effect on the date on which the ratified documents are exchanged.

2020 FIDLEG FIDLEG contains rules of conduct that financial services providers in Switzerland must observe with regard to their customers. Its core content is comparable with the EU directive MiFID II.

82 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 83 III Developments in selected areas of business

III. 2.2 Role and relevance of wealth management in Switzerland Fig. 26

With CHF 3.7 tn of assets, wealth management is of central importance to the Central role of wealth management for the Swiss economy financial centre and the Swiss economy. Banks offer a comprehensive range of ser- vices for private customers and cover all areas of holistic asset planning (see Fig. 26). Economic relevance • Efficient asset allocation • Effective risk/return ratio • Contributes to the liquidity and stability of financial markets There are few financial centres that can provide a similar density of specific ser- vices and long-standing expertise in the field of wealth management compared to Switzerland. These services range from investment advisory, tax advisory and Ecosystem Wealth Wealth management “Producers” management Customers inheritance advisory to philanthropy advisory. Switzerland’s international focus and Internal banking services: Holistic asset planning (not Internal banking services: multilingualism, as well as the knowledge of cultural differences in target markets, • Basic services (accounts, deposits, exhaustive) • Private individuals cards, online services, mortgages, • Investment strategy / asset allocation • Families its central location in Western Europe and its first-class transport links allow banks etc.) • Access to financial markets / prod- • Entrepreneurs • Asset management (e.g. funds) ucts / exclusive investment (e.g. IPOs, in Switzerland to provide customised services for customers from all regions of the • Management mandates, advisory hedge funds, etc.) • Family offices mandates, etc. • Financing (Lombard loans, aircraft/ • Foundations, trusts world. • Issuers of structured products yacht finance, etc.) • Private label funds • Research • Suitability and appropriateness test- Other financial service providers: ing for investment products • Financial markets • Pension planning, tax and inher- • External asset managers itance consulting • Issuers of private equity, venture • Succession solutions capital • Custody solutions • Fintech start-ups • Philanthropy services

Advisory: • Trustees, lawyers • Tax experts • Relocation companies

Spillover effects For other economic sectors: Within banks: • Tourist, event organisers • Retail customers benefit from wealth management expertise • Luxury goods, art trade • Refinancing • Image of Switzerland • Transformation of retail customers into wealth management customers

Quelle: SBA

In addition to direct value creation, wealth management is closely connected with other banking segments – as a trading partner or a provider of preliminary services. For example, wealth management and its customers are purchasers of investment products supplied by the investment management industry and are trading partners and financiers of loans, initial public offerings (IPOs) and private equity. Around

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27 percent of the collective investments managed by asset managers in Switzer- years, emerging markets in the Far East, Latin America, the Middle East and Eastern land, corresponding to CHF 345 bn, are held by private customers.44 A further Europe have seen the strongest growth in private wealth. This is also the reason CHF 516 bn are held in discretionary mandates. The retail segment and the corpo- why Swiss banks have, for some time, been operating at a local level in foreign rate clients business benefit from the expertise of the wealth management industry locations and are increasing the scale of these operations. Customers are also more and also provide a pipeline of customers moving into this segment. and more interested in receiving services from different locations and on a com- bined basis. In Switzerland, numerous services have developed that complement wealth man- agement. They are supplied by various providers of advisory services such as fidu- This trend is likely to continue in the medium term, according to a forecast by ciaries, lawyers and tax experts who offer asset-related services to domestic and BCG (see Fig. 27). Growth in managed cross-border assets of 2.8 percent is fore- foreign bank customers. In addition to these indirect effects, wealth management cast for the Swiss wealth management industry, which is significantly below the also drives demand in further areas of the economy. For example, tourism and the growth rate in Hong Kong and Singapore. These two financial centres are deriving luxury goods and art trade also benefit as they address similar target groups to the greatest benefit from the enormous accumulation of wealth in neighbouring wealth management. countries, especially in China. Other European wealth management centres such as Luxembourg, the Channel Islands and the UK mainland are also likely to see slower From a macroeconomic perspective, wealth management makes a significant con- growth for the same reasons as Switzerland. tribution to the efficient allocation of assets as well as to the relationship between the overall economic return and overall economic risk. Banks and their customers Fig. 27 thus lay the foundations for the liquidity and stability of financial markets, which ultimately contributes to the economic success of the entire national economy. Assets under management and growth forecasts for the largest cross-border wealth management centres 2018–2023 III. 2.3 Competition between wealth management centres Assets under management in CHF tn, growth forecasts in percent

Switzerland 2.3 2.8 % With a market share of around 27 percent, Switzerland is by far the most important Hong Kong 1.3 7.8 % financial centre for cross-border wealth management. In addition to its unparalleled range of high-quality services, its highly experienced workforce and its favourable Singapore 1.0 7.3 % regulatory landscape, Switzerland’s geographical and cultural proximity to what USA 0.8 6.5 %

were previously the most important growth markets was a major factor contribut- Channel Islands & Isle of Man 0.5 4.2 % ing to this result. United Arab Emirates 0.5 6.4 %

In view of the continued difficult economic environment in Western Europe – the Luxemboug 0.3 2.6 % most important market for wealth management – and as a result of significant reg- UK mainland 0.3 3.2 %

ulatory changes, the Swiss wealth management industry has experienced weaker 0 3,0 growth in recent years than other locations, especially in Asia. During the last few NB: The blue bars represent the assets under management in CHF tn. The red percentages (red) represent the annual growth forecasts.

44 Estimate by the SBA based on a survey conducted as part of the IFZ / AMP Asset Management Study 2019. Source: BCG

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Western Europe is by far the most important market for Swiss wealth management, Fig. 28 accounting for 42 percent of assets under management, followed by the Middle Switzerland is the best diversified financial centre East, Latin America and Asia. Even though Switzerland does not border on the 2018, breakdown of cross-border private assets under management by region, in most important growth markets and gains less benefit from their development than percent, based on customer domicile (AuM: assets under management) other wealth management centres, it displays a high level of global diversification Switzerland Hong Kong Singapore USA in terms of customer domiciles: four regions of the world account for more than 10 AuM CHF 2.3 tn. AuM CHF 1.3 tn. AuM CHF 1.0 tn. AuM CHF 0.8 tn.

3% 6% 7% 5% 12% 6% percent of assets under management and no one region has a proportion of over 15% 16% 7%

50 percent. Apart from the UK mainland, which has a significantly lower volume 7% 12% 27% of assets under management, none of the other main competing financial centres 42%

displays a similarly diversified portfolio of customer domiciles. Singapore and Hong 13%

43% Kong are, for example, focused unilaterally on customers from Asia. Luxembourg 18% 83% 79% and the Channel Islands are focused on Western Europe, the U.A.E. on the Middle Channel Island & Isle of United Arab Emirates Luxembourg Mainland UK East, and the US on Latin America. Consequently, Switzerland is less exposed to AuM CHF 0.5 tn. AuM CHF 0.5 tn. AuM CHF 0.3 tn. AuM CHF 0.3 tn.

1% 6% 7% 10% 5% weak growth in individual regions of the world than other wealth management 6% 7% 18% 23% 7% 9% centres. 17% 9% 8% 44% 8% 8%

5% 9% 58%

High compliance-related fixed costs for servicing individual customer domiciles can 60% 13% 7% 20% 29% thus be balanced more effectively if the respective market is of a sufficient size. 6% Diversification thus offers considerable benefits for business success. Western Europe Oceania Asia Central/Eastern Europe North America Middle East CIS Regions < 5 % Japan Latin America Africa

Source: BCG

In terms of the banking services taken up by customers, a shift is occurring away from self-managed assets and external asset managers towards advisory mandates (see Fig. 29).45 In contrast, the proportion of discretionary mandates and account deposits has remained stable. This trend means that banks are providing an ever- larger proportion of services and are generating value accordingly. At the same time, the largest proportion of cross-border assets is managed by customers them- selves (33 %) or held in accounts (24 %). The period under review, starting in 2015, was characterised by a zero or negative interest rate environment as well as positive

45 In advisory mandates the consulting institution gives recommendations for implementing the customer’s investment strategy. In management mandates, the bank makes investment decisions in accordance with the customer’s pre-defined investment strategy.

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financial market developments. Account balances would probably have generated III. 2.4 The financial centre is attractive and complies with the rules higher income if this money had been invested – e.g. in the form of mandates. Thanks to innovative, digitally supported offerings, discretionary and advisory man- In view of the far-reaching regulatory changes in cross-border wealth management dates should account for an ever-larger proportion of total assets under manage- (see Chapter 1), fears have been expressed on several occasions that the importance ment in the future. of the Swiss financial centre could diminish. In particular, the introduction of the Automatic Exchange of Information with 89 partner countries at present – and the subsequent disclosure of customer assets at the start of 2017 – was expected to Fig. 29 lead to a substantial outflow of assets. Following the entry into force of the major- Advisory form selected for cross-border assets at Swiss banks ity of the new regulations and the transfer of the first customer data to foreign Proportion in percent, domestic and cross-border customer relationships tax authorities, it was determined at the end of 2018 that while the business had

100 undergone significant changes, the worst fears have not materialised.

90 25 % 24 % 80 Overall, the volume of assets under management in Switzerland grew from

70 8 % CHF 1,970 bn in 2013 to CHF 2,270 bn in 2018 (see Fig. 30). The volume of assets 17 % 60 from customers from all regions of the world increased. The largest growth of 16 % 50 16 % CHF 110 bn was seen in the category «Other», which encompasses Eastern Europe,

40 CIS countries and Africa. Customers from the Middle East as well as Asia / Pacific

30 37 % collectively accounted for around CHF 120 billion of additional assets. The net 33 % 20 growth in assets from customers in the Americas and Western Europe regions was

10 lower at CHF 50 bn and CHF 20 bn, respectively, but remained clearly positive. 14 % 11 % 0 2015 2016 2017 2018

Customer deposits Management mandates External asset managers Advisory mandates Self-managed

Source: BCG

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Fig. 30 Looking at total assets under management, it emerges that the outflow was more Change in assets under management in the cross-border business than offset by successful investment strategies and favourable market performance. CHF bn, by region This shows that the Swiss wealth management offering is intact and continues to attract strong demand from foreign customers.

2,500 1,970 2,270 Fig. 31

960 2,000 Assets of Western European customers at banks in Switzerland 940 In CHF bn

1,500 +2 %

280 940 960 115 1,000 95 220 320

270 W. Europe 410 500 Asia / Pacific 350 America 300 Middle East 190 0 Other 2013 2018

Source: BCG

In addition to the net inflow of assets, investment performance is also responsi- Assets under Net new assets Market performance Assets under ble for part of the changes. In Western Europe, the most important cross-border management management market for Swiss wealth management, the growth in assets of CHF 20 bn since 2013 2018 2013 reflects a net outflow of CHF 95 bn on the one hand, and an increase in the Source: BCG value of continuing customer relationships of CHF 115 bn on the other (see Fig. 31). The outflow corresponds to around 10 percent of assets under management from III. 2.5 Income remains stable, margin declines Western European customers. This is a substantial figure but is well below the expectations of numerous commentators, who estimated the effects of the transi- tion to the Automatic Exchange of Information to be significantly higher.46 The level of income generated in the wealth management industry has not, how- ever, been entirely unaffected by the regularisation of foreign assets and by further changes in the market and the legislative framework. According to estimates by BCG, gross income from domestic and foreign customers totalled CHF 25 bn for the entire sector in 2018, with two-thirds stemming from the cross-border business (see Fig. 34). Compared to 2013, the volume has increased by 0.3 percent annually, which represents avery low growth rate compared to the increase in assets of 46 E.g. Neue Zürcher Zeitung of 27 April 2019: «Bankenplatz hat Hunderte Milliarden verloren.» The author of 3.2 percent. Margins have thus been reduced. The «return on assets» indicator the article estimates the reduction in assets between 2009 and 2019 to be between CHF 300 and 400 bn.

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shows the level of gross income generated by financial institutions for each CHF Fig. 32 they manage. From 2013 to 2018, this figure decreased by 12 basis points, from Income and margins in Swiss wealth management 90 to 78 basis points, for the entire business. The reduction is more significant in Gross income: in CHF bn; return on assets (RoA) in basis points (right-hand scale) the case of the cross-border business but the domestic business, which traditionally

has lower margins, is also affected. 30 +0.3 % p.a. +2,.6 % p.a. 95

90 Margins are already at a similar level to the financial centres that are Switzerland’s 25 main competitors. Margins are therefore unlikely to decrease strongly in the com- 85 20 ing years. BCG expects to see a decrease of 2.4 basis points by 2023, which is a 80 low figure compared to developments in the past. In view of the anticipated strong 15 growth in assets under management, overall income should once again grow by 75 10 2.6 percent annually. The Swiss wealth management industry can increasingly offer 70 its high-quality services without charging a premium compared to other financial 5 65 centres.

0 60 However, gross income and the return on assets are indicators that show only part 2013 2018 2023 (FC)

of the financial impacts of regulations on banks: increased requirements governing Income from cross-border business RoA from cross-border business (right-hand scale) customer tax compliance have driven up costs in cross-border wealth management. Income from domestic business Total RoA (right-hand scale) RoA from domestic business (right-hand scale) The effects cannot be quantified using the available data but they are likely to have a decisive influence on the profitability of cross-border customer relationships – Note: Margins: Return on assets (RoA) excluding lending business. especially in the transition phase. Source: BCG

In view of the far-reaching changes in the area of cross-border wealth management, the Swiss wealth management industry has proven very robust. The anticipated net outflows from customers in mature markets such as Western Europe and North America were more than offset by inflows from other regions. At around 10 percent of assets under management, the effect among Western European customers was also much lower than anticipated or suggested by other sources. This shows that even in a market with tax transparency, the majority of customers served by the Swiss wealth management industry want to benefit from the advantages offered by Switzerland and the high-quality advice of its financial institutions. With their broad range of services, these institutions have all the necessary strengths to prosper in a competitive environment in which advisory quality is more of a determining factor than pricing or national regulations.

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III. 2.6 A highly innovative financial ecosystem Fig. 33

The wealth management industry benefits from a highly specialised ecosystem in Pending structured products in bank assets 48 Fussnote anpassen! the Swiss financial centre. It has a high concentration of asset managers, providers In CHF m, for each custodian bank location

of structured products, innovative fintech companies and other banking services 350,000 such as investment banking, as well as an advanced financial infrastructure. This 300,000 allows for a wide-ranging dialogue and competing ideas that facilitate the continu- ous further development of products and services for private customers. The rela- 250,000 tionship between wealth management and investment management was analysed 200,000 in detail in a comprehensive study by the Swiss Bankers Association in December 2018.47 150,000

100,000 Another important relationship exists between wealth management and provid- 50,000 ers of structured products, which are used primarily by private customers: with

CHF 179 bn at the end of 2018, Switzerland is by far the largest market for this type 0 of investment globally, according to the Swiss Structured Products Association. 2014 Q4 2015 Q4 2016 Q4 Q 4 2017 Q4 2018 Q4 Austria Switzerland Among the markets evaluated in Europe, Switzerland accounts for more than 60 Belgium Germany percent of the market volume and is around 2.5 times larger than the correspond- Source: EUSIPA, SNB ing market in Germany in terms of volume (see Fig. 35). 48 In addition to their size, Swiss providers are also leaders in product innovation and the Swiss financial centre has been the first globally to launch various prod- ucts. Customers of the Swiss wealth management industry thus benefit from an exceptionally large selection of novel investment products and from considerable expertise concerning the implementation of those products in individual investment strategies.

According to the IFZ, a total of 66 (or 19 %) of the 356 Swiss fintech companies were focused on wealth management at the end of 2018. In addition to robo advi- sors, this encompasses automated pension solutions, software to support advisory discussions and other applications. These firms are partly competing with banks and partly collaborating with them. In both cases, customers of the Swiss wealth

48 For Switzerland, figures were determined at the location of the issuer. The Swiss figures therefore include a 47 Swiss Bankers Association (2018). Switzerland – A strong hub for investment management. small proportion of structured products issued in Switzerland but managed abroad.

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management industry can benefit from this dynamic innovative environment, which higher than in other banking segments. Depending on the business model, level of may be less likely in financial centres with a less advanced technological landscape. digitalisation, customer requirements and focus of the respective bank, the nature of these functions can vary very significantly. In addition to banks, the Swiss financial centre’s ecosystem includes a large and competitive insurance sector. In addition to direct relationships based on products Fig. 34 (e.g. insurance linked securities such as catastrophe bonds), banks benefit indirectly Employees in wealth management, listed by function from this concentration of insurance expertise in Switzerland: their geographical 2018, proportion in percent, full-time equivalents proximity and the labour market ensure the movement of specialists between banks, insurers, fintech start-ups and other companies.

Customers of the Swiss wealth management industry find themselves in a financial centre characterised by strong innovation and a competitive ecosystem. This gives Total them access to every kind of investment opportunity and to longstanding experi- 100 % ence in the area of individual wealth management. Customer service | 42 % Tax/asset planning | 3 % Investment advice | 11 % III. 2.7 Employment, talent pool and certification in wealth management Portfolio management | 10 % Administration / IT | 18 % Support functions | 16 % Wealth management is undergoing a significant transformation: customer advisory services are increasingly being supported by digital solutions and the expertise of NB: SBA estimate based on a survey of member banks as well as on annual reports. specialists. Furthermore, regulatory developments concerning customer advice, the Source: SBA selection of suitable investment products and tax regulations now require the con- tinuous and comprehensive further training and development of specialist staff. The demands placed on employees in various parts of the value chain are thus rising Wealth management requires a high level of experience. The longer client advisors continuously. More than in almost any other industry, wealth management needs a have been addressing the circumstances of private individuals and their families and pool of well-qualified and motivated talents who are capable of learning. the more precise their understanding of their requirements, the better they can identify their individual needs. It is particularly for this reason that the wealthiest

Around one-quarter of all bank employees in Switzerland work in the field of customers are often served by the most experienced advisors. At the same time, wealth management. This corresponds to 23,000 employees (full-time equivalents). lifelong learning is considered important, even in the case of client advisors with At 40 percent, by far the largest share are responsible for advising customers (see long careers. Innovative financial products, digital solutions and regulatory develop- Fig. 34). Other directly customer-oriented functions such as portfolio management, ments all create the need for customer-facing employees to constantly engage in tax and wealth planning, as well as investment advisory and portfolio manage- further training. At the same time, banks must ensure that younger, talented and ment, cumulatively account for 24 percent of employees. A further 34 per cent are highly qualified client advisors are given the opportunity to assume responsibility employed in the areas of administration, information technology and other support and gain experience. functions. To meet the customer demand for individual advice complemented by specific expertise, the proportion of customer-oriented functions is significantly

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More than one-third of client advisors working in the Swiss wealth management Skilled client advisors are the key to a bank’s success. Constantly growing customer industry have more than ten years of experience with their organisation, and almost needs and compliance requirements, as well as new digital applications, necessi- two-thirds have over five years of experience (see Fig. 35). Switzerland can therefore tate the ongoing training of customer-facing employees to ensure the provision offer a much greater wealth of experience in advising customers than, for example, of high-quality advice. Since 2017, the SBA has recommended that its members Asian financial centres such as Singapore and Hong Kong, where client advisors have their client advisors certified to the standards of the person certification «Cli- with many years of experience tend to be something of an exception. In contrast, in ent Advisor Bank» of the Swiss Association for Quality.49 This allows the quality, Luxembourg more than half of client advisors have been working for the same insti- professionalism and excellence of the customer advisory offering to be promoted tution for more than a decade. However, younger client advisors are comparatively effectively and sustainably and to be documented for customers. An independent rare in Luxembourg. Furthermore, in Switzerland, there is also a visible trend where proof of competence demonstrates to customers that both the bank and each of its a large proportion of client advisors assume other responsibilities in the financial employees gives the highest priority to this goal. centre in the course of their careers, e.g. as product specialists, portfolio managers, in investment management or at other institutions. Depending on the advisory function, the SAQ has defined different certifications, with the category «Certified Wealth Management Advisor» (CWMA) represent- Fig. 35 ing by far the most frequent form of certification. It requires candidates to pass a written banking examination as well as a verbal customer consultation test. Each Experience of key account managers individual must prepare properly for the examination, with or without completing a Number of years of experience at the same institution preparatory training course. Furthermore, client advisors must undergo recertifica- 100 % 20.7 % 16.3 % 24.1 % tion measures every three years in order to renew their certification.

16.4 % 50 16.9 % At present, almost 13,000 bank employees have a valid certification as a client 29.5 % 50 % advisor, of which more than half are in the category CWMA (see Fig. 36). Around 13.3 % 26.8 % one-quarter of these employees are certified as an «Advisor Individual Clients» 54.0 % and a further 1,400 as an «Advisor Private Clients». Compared to October 2017, 27.1 % the total number of certifications has risen by 37 percent, with increases across all 25 % 35.6 % categories. With the support of the SBA, Swiss banks want to have the SAQ person

19.3 % certification «CWMA» recognised in various European countries.

0 % Switzerland Luxembourg Singapore / Hong Kong

< 2 years 5–10 years 2 – 5 years > 10 years

Source: BCG

49 Swiss Bankers Association (2017). Recommendation for SAQ person certification. 50 The number of certificates is spread across the wealth management, retail banking and corporate banking segments.

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Fig. 36 The nature of competition has altered. In the past, it was influenced primarily by national regulatory differences, whereas today, there is a trend towards competition 12,770 certified bank employees based on quality and performance. Swiss financial institutions are at a significant Number of certifications by area of specialisation advantage in this context: almost no other location has such a comprehensive,

14,000 +37 % high-quality, professional, and culturally and linguistically diversified wealth man- agement industry as Switzerland. Virtually no other location has a similarly well-di- 12,000 1,400 versified portfolio of customer domiciles and can thus balance the relevant compli-

10,000 3,230 ance requirements and the related fixed costs with sufficiently high economies of 919 scale. 8000 260 1,990 760 190 111 6000 561 119 In view of the major economic importance of the financial centre in general, and

4000 of the wealth management industry in particular, the current challenges facing the 6,930 5,600 sector make it all the more vital to eliminate comparative regulatory disadvantages 2000 – especially regarding the following topics:

0 10.2017 04.2019 • EU market access and stock market equivalence: as already stated in the

Advisor Private Clients Advisor SME Clients Advisor Affluent Clients introductory chapter 1.1, the wide-reaching lack of market access for institu- Advisor Individual Clients Corporate Banker (CCoB) Certified Wealth Management Advisor tions operating out of Switzerland at present represents a challenge for Swiss Source: SAQ banks active in the field of wealth management. To preserve value creation, jobs and tax revenues in Switzerland, practicable solutions governing market access need to be found. Now that Switzerland has equivalent regulations to the EU in III. 2.8 Conclusion und outlook: securing a leadership position technical and transparency terms, there are no longer any legitimate reasons to exclude Switzerland from the European single market. The European Commis- The Swiss wealth management industry remains a central pillar of the Swiss sion’s decision not to extend Switzerland’s stock market equivalence is one financial centre despite far-reaching macroeconmic, regulatory and technological example that shows the difficult nature of the corresponding negotiations, which changes. Inflows from various regions of the world as well as market performance are not void of political interests. have more than offset the outflow of assets from European customers. At the same time, banks are operating with narrower margins on assets under management. • Withholding tax and stamp duty: these levies, which are specific to Swit- However, this means that in terms of the fees it charges, the Swiss wealth manage- zerland, represent a self-imposed disadvantage. By abolishing stamp duty and ment industry can compete with foreign financial centres and has become more reforming withholding tax, the Swiss financial centre could win back parts of the efficient. Geographically, the key growth markets for private assets are located far value chain that have been transferred abroad. Furthermore, it would become from Switzerland. Other financial centres thus benefit more significantly from the more attractive for foreign private wealth in important areas. automatic advantages that exist for neighbouring countries. Nevertheless, the trend towards globally-oriented customer needs is likely to benefit Switzerland’s interna- tionally focused and diversified financial centre.

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• A level playing field in cross-border wealth management: with US FATCA • Political stability: the transition to a tax-transparent cross-border wealth legislation, US financial centres previously enjoyed unilateral advantages. While management business has largely been completed at a regulatory level. In view of Switzerland and other financial centres had to deliver data on US persons, they the continued instability of the banking system in the Eurozone, the high level of were not supplied with any information in return. This situation should change as sovereign debt and uncertainty surrounding Brexit, Switzerland has emerged as a result of the additional protocol to amend the dual Swiss-US double tax treaty a reliable financial centre for cross-border customer relationships. In this changed between Switzerland and the US approved by the US Senate in July 2019. operating environment, the Swiss wealth industry now has the opportunity to enter a new phase as a haven of stability. In addition to its existing strengths, the Swiss wealth management industry needs to focus its attention on the issues of tomorrow. From today’s perspective, the Swiss financial centre can set itself apart in the following areas in particular:

• Sustainable finance: in view of climate change and the growing awareness about ESG (environmental, social, governance) topics, investors are assigning ever- greater importance to the sustainability of their investments. According to a 2018 study by Swiss Sustainable Finance, the volume of sustainable investments in Swit- zerland has already reached CHF 716 bn.51 This corresponds to around 20 percent of professionally managed assets and is clearly ahead of the estimated global average of around 11 percent.52 Switzerland is predestined to take ownership of this topic and to subsequently derive locational advantages from it.

• Digitisation: digital technologies are unstoppable and are transforming the financial centre – in wealth management and in other areas of the banking industry. Trends and new developments require new business models along the entire value chain. These new models have a partly disruptive impact on existing structures and can trigger profound changes. At the same time, Switzerland has an opportunity to position itself as a digitally leading financial centre in order to secure long-term advantages. The initial basis for this is already in place with «Crypto Valley» and other success stories.

51 Swiss Sustainable Finance (2019). Swiss Sustainable Investment Market Study 2019. 52 McKinsey & Company (2019). Performance Lens Global Growth Cube; Global Sustainable Investment Alliance (2014, 2016 & 2018).

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III. 3 Switzerland – a strong investment management hub Fig. 37

Global investment management is a growing area of the finance industry in Swit- CHF 3.3 tn assets under management in the investment management zerland, like in other countries. In recent years, investment management for insti- industry tutional and private customers has established itself as the central pillar of Switzer- 2018, in CHF bn 563 3,344 land’s finance industry and as part of its value proposition. Investment management 3,400 3,200 generates significant added value for the financial sector and real economy through 3,000 2,800 104 the efficient allocation of capital and by ensuring efficient markets and the profes- 2,600 516 2,400 sional management of institutional and non-institutional assets. 2,200 2,000 918 2,161 1,800 The term «investment management» encompasses the management of collective 1,600 1,400 investment schemes (including exchange traded funds) and discretionary and advi- 1,200 387 sory mandates for both institutional and non-institutional clients. The SBA study 1,000 800 856 published in 201853 broadly examines this area and shows the strengths of the 600 400 combined institutional and non-institutional investment management industry in 200 Switzerland. This broad definition also allows for a symbiotic relationship between 0 Collective Foreign Management IFZ / AMP Management Advisory Advisory Total both types of business and for their positive interaction in terms of innovation and capital collective mandates Asset mandates (non- mandates* mandates* assets under investments capital (institutional) Management institutional) (institutional) (non-institutional management infrastructure, given the enormous combined pool of investible assets that exists. under Swiss investments Study 2018 law managed in Switzerland

* Advisory mandates do not comprise any cash and self-directed portfolios. They consist exclusively of the pure mandates business.

Source: SBA; IFZ / AMP Asset Management Study 2019

In 2018, investments totalling CHF 3.3 tn were managed in Switzerland (see Fig. 37). This figure is around five times larger than Swiss GDP and around four times larger than the total volume of Swiss pension fund assets.

Compared to the previous year, assets under management decreased by around 1 percent, reflecting a combination of market movements of around -2.8 percent and inflows of new money of around 1.8 percent. There have been few changes in the composition of assets. The structural trend towards advisory mandates has partially offset negative market performance, resulting in only a slight decline.

53 Swiss Bankers Association (2018). Switzerland – A strong hub for investment management.

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Fig. 38 Fig. 39

Decline in assets under management in investment management of 1 % Role and relevance of investment management from 2017 to 2018 Managed assets in CHF bn Proportion as a percentage Economic relevance • Capital allocation via meritocratic investment decisions + 13 % - 1 % Efficient • Arrangement and replacement of traditional sources of financing Risk- • Influence on the exercise of voting rights and dialogue with investors financing • Market efficiency and system stability appropriate 3,386 3,344 100 4000 • Professional management of pension funds 16 16 17 547 • High added value and attractive jobs 2,987 563 90 3500 471 3 3 3 102 80 104 15 16 15 3000 529 516 91 70 455 Investment universe Investment manager Investors’ universe 2500 28 28 27 60 947 918 as intermediary 845 50 Public markets • Pension funds 2000 • Bonds • Preservation of fiduciary interests • Insurance 40 • Stocks • Access to investment universe • Sovereign wealth funds 1500 • listed instruments • Assessment and selection • Family businesses 11 381 387 11 12 30 • Portfolio building • Quasi-institutional 340 Private markets / • Risk management • UHNWIs* 1000 alternative investments • Structuring • Private investors 880 856 26 26 25 20 785 • Equity capital • Representation of investor interests 500 10 • Private placements • Infrastructure • Property 0 0 • Hedge funds 2016 2017 2018 2016 2017 2018

* Ultra high-net-worth individuals Advisory mandates (non-institutional) Management mandates (institutional) Advisory mandates (institutional) Foreign collective capital investments under management in Switzerland Source: SBA, BCG Management mandates (non-institutional) Collective capital investments under Swiss law

Source: SBA, IFZ / AMP Switzerland’s strength in institutional and non-institutional investment management sets it apart and represents a competitive advantage that benefits domestic and Investment management plays a central role in the allocation of capital, the creation foreign customers in equal measure. Switzerland is the leading financial centre glob- of market efficiency and the generation of returns for investors. It is precisely for ally for the management of the cross-border wealth of private customers as well this reason that sustainable investments are of major and growing importance for as one of the largest investment management hubs in Europe. There is a «cross- the Swiss financial centre. fertilisation» effect between the two vast pools of associated assets, promoting investment activity.

The following five facts about investment management in Switzerland are evidenced by various studies and the measurement of relevant variables:

108 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 109 III Developments in selected areas of business

1. Switzerland offers good operating conditions for investment managers Fig. 40 such as talent, expertise, a stable economy and political system and a modern infrastructure to attract domestic and foreign customers with their products The proportion of foreign contracting partners in investment management and solutions. Industry surveys show that «access to talent» ranks as the top continues to grow priority for investment management alongside market access. According to the Managed assets in CHF bn Proportion as a percentage IMD World Talent Ranking that is produced annually, Switzerland once again + 13 % - 1 %

54 3,387 came out on top in 2018. More specifically for investment management, the 4000 3,344 100 67.3 67.1 66.2 2,272 CFA Institute also measured CFA charterholder penetration in core investment 2,987 2,213 90 3500 management functions in 2016.55 Here, Switzerland occupies fourth place glob- 2,010 80 ally, with only the English-speaking countries where the CFA Institute originated 3000 70 ranking higher. 2500 60

2000 50 2. Swiss investment management can compete globally, thus boosting the 40 1500 export of this service. Of the CHF 3.3 tn of assets under management in Switzer- 33.8 1,115 1,131 32.7 32.9 30 land, 34 percent are managed for customers in foreign markets, thus underscor- 1000 977 20 ing the Swiss economy’s increased focus on exports (see Fig. 41). This figure has 500 10

increased even further compared to previous years. 0 0 2016 2017 2018 2016 2017 2018

To continue achieving growth in a fiercely competitive and saturated Swiss Contracting partners in Switzerland investment market in the future, investment management firms will increasingly Contracting partners abroad need to focus on foreign customers. Source: SBA, IFZ / AMP Asset Management Study 2019

3. Switzerland is an innovation hub in the investment management industry. The relationship between institutional and non-institutional investment managers in Switzerland is becoming more symbiotic since bank-client confiden- tiality is today less relevant for private customers. Investors are increasingly plac- ing an emphasis on performance. The increased joint holdings of investible assets of institutional and private customers creates incentives for innovation within the industry. Switzerland has the necessary infrastructure, talent, knowhow, tax law, liberal immigration laws and stable political system to support the highly innova- tive investment management industry. The volume of alternative investments is significantly lower than that of traditional asset classes but a large proportion of investment managers in Switzerland take alternative asset classes into considera- 54 International Institute for Management Development (2018). IMD World Talent Ranking 2018. tion. The proportion of alternative asset classes (22 %) is significantly higher than 55 Swiss Bankers Association (2018). Switzerland – A strong hub for investment management.

110 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 111 III Developments in selected areas of business

the global average (15 %). At 27 percent, the proportion of passive investments 4. The Swiss investment management industry is liberalised and open to in Switzerland is also above the global average of 20 percent. Compared to the foreign products. Switzerland has a liberal market economy and is an open previous year, significant growth was recorded both in the proportion of alterna- economy that has attracted more and more foreign investment managers. From tive asset classes, which rose by 5 percent, and the proportion of passive invest- among the 20 largest fund managers in Switzerland (based on assets from a dis- ments, which increased by 4 percent. tribution view), eight companies are domiciled outside Switzerland. Those eight companies distribute around 12 percent of assets. Of the top 20 investment Fig. 41 management products in Switzerland, the proportion distributed by foreign com- panies rose from 11.1 percent in 2008 to 15.4 percent in 2017. Switzerland is an innovation hub in investment management

Investment in alternative asset Passive portfolio management, Fig. 42 classes, relative, in percent relative, in percent Distribution to foreign contracting partners is more highly dependent on 28 % intermediaries than distribution to domestic contracting partners 24 % 23 % Assets under management in Assets under management in Switzerland 2018, relative, Switzerland 2018, nominal, 19 % 19 % 18 % in percent estimated, in CHF bn. 16 % 100 % 100 % 2,213 15 % 84 % 54 % 1,859

1,131

2017 2018 2017 2018 2017 2018 2017 2018 611 Switzerland Global Switzerland Global 46 %

Note: Alternative investments comprise private equity, hedge funds, real estate, insurance linked securities (incl. catastrophe bonds), investments in commodities and infrastructure; the charts represent the production view, 520 not the distribution view, of assets in Switzerland in 2017 and 2018. 16 % 354

Source: SBA, IFZ / AMP, BCG Swiss contracting Foreign contracting Swiss contracting Foreign contracting partners partners partners partners

Direct distribution Distribution via intermediaries

Note: Estimates of nominal values are based on the relative proportions of estimated assets under management in the Swiss investment management industry.

Source: SBA, IFZ / AMP

112 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 113 III Developments in selected areas of business

5. Highly developed financial products are a factor determining the success of the Swiss investment management industry. Switzerland offers highly Six trends in global and Swiss investment management developed products and has considerable experience in providing focused and In its analysis of company- and industry-specific data, the SBA identified six sophisticated customer solutions. It sets itself apart from other financial hubs main trends in the area of global and Swiss investment management: such as Hong Kong or Singapore with its structured investment advisory pro- cesses, its solid pool of highly-talented professionals as well as its long tradition • Symbiosis of institutional and non-institutional investment manage- of wealth management. ment: Switzerland is in the enviable position of having a strong investment management industry servicing both institutional and non-institutional cli- The continued polarisation in investment management in terms of volumes (e.g. ents. This increases the pool of investible assets, incentivises innovation and passive products) on the one hand and niche products (e.g. alternative products) provides global credibility. on the other is likely to continue. In addition, investment managers will have to leverage technologies in order to optimise administration and management, as • Investment management is increasingly focused on scale or special- well as offering integrated and digitalised platforms for customer interaction. ised products: providers need to focus either on asset scale (active or passive products) or on sophisticated, higher-margin products. Businesses Switzerland has the necessary conditions – a strong economy, a large pool of are increasingly accessing private capital markets for debt and equity, which talent, expertise, access to capital, a stable political system and an independent will increase the share of these products in investment management. Play- judiciary – to support a robust investment management industry. However, care ers in the mid-market are at risk: competition is becoming fiercer, regulatory needs to be taken that other prerequisites such as access to European institu- requirements and technology will continue to exert pressure on margins. tional clients, appropriate regulation and tax laws are structured in such a way Firms must identify sustainable competitive advantages in scalable or as to facilitate innovation, attract foreign investment and stimulate the continued non-replicable niche products to materially grow assets under management growth of the industry. and remain relevant.

• Technology presents key opportunities: on the one hand, technology will require material investment and increase transparency, which applies pressure on margins; on the other hand, technology gives investment man- agers the opportunity to make their businesses more efficient while provid- ing customers with an integrated investment management platform.

114 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 115 III Developments in selected areas of business

• Institutional and non-institutional investment management prod- ucts and solutions are becoming increasingly homogenous: non-institutional clients increasingly expect the same service and perfor- mance as institutional clients while investment management’s access to a larger asset mass drives innovation. Non-institutional investment managers will increasingly leverage products and solutions developed in the institu- tional business.

• Switzerland needs to strengthen the prerequisites for its invest- ment management industry to maintain its position in global investment management: pro-business conditions such as a stable polit- ical system, a liberal market economy, the independent rule of law and the tradition of an open economy must be maintained. Basic prerequisites for the investment management business such as access to talent, local exper- tise, high volumes of investible assets and appropriate financial regulation must be strengthened. Finally, regulatory conditions in the dynamic and fiercely competitive global investment market need to take account of the ability of Swiss players to compete.

• Government and industry support is needed to drive competitive advantage for the Swiss investment management industry: main- taining good access to foreign specialists, the recognition of «equivalence» to ensure access to European institutional clients, the abolition of stamp duty and the reforming of withholding tax would improve the competitive- ness of Swiss investment managers.

116 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 117 List of sources

Institute of Financial Services Zug (IFZ) List of sources «Studie zur Finanzierung der KMU in der Schweiz 2016», June 2017 «FinTech Study 2019 – An Overview of Swiss FinTech», February 2019 «Crowdfunding Monitoring – Switzerland 2019», May 2019 Boston Consulting Group (BCG) «Global Wealth 2017: Transforming the Client Experience», June 2017 Institute of Financial Services Zug (IFZ) / Asset Management Platform «Global Wealth 2018: Seizing the Analytics Advantage», June 2018 Switzerland (AMP) «Global Wealth 2019: Reigniting Radical Growth», June 2019 «Asset Management Study 2019 – An Overview of Swiss Asset Management», June «Global Asset Management 2019», July 2019 2018

Employers Association of Banks in Switzerland International Institute for Management Development (IMD) «Die Schweizer Banken auf dem Weg in eine neue Arbeitswelt – press release», «IMD World Talent Ranking 2018», November 2018 January 2019 International Monetary Fund (IMF) Ernst & Young (EY) «World Economic Outlook», July 2019 «EY Banking Barometer – Signs of the Times», January 2019 McKinsey & Company European Structured Investment Products Association (EUSIPA) «Performance Lens Global Growth Cube. Global Sustainable Investment Alliance «Market Reports», May 2019 (2014, 2016 & 2018)», 2019

Federal Council Neue Zürcher Zeitung «Bericht des Bundesrates zum Prüfmechanismus zur Sicherstellung der «Bankenplatz hat Hunderte Milliarden verloren», April 2019 standardkonformen Umsetzung des AIA 2018 / 2019», May 2019 Polynomics Federal Statistical Office «Banken und Versicherungen in der Schweiz – Analyse der volkswirtschaftlichen «Swiss Labour Force Survey (SLFS)», July 2019 Bedeutung des Finanzsektors 2017», November 2018

Future of the financial centre advisory board SAQ Swiss Association for Quality «Jahresbericht 2017 zuhanden des Bundesrates», December 2018 «SAQ Personnel Certification Client Advisor Bank Fact Sheet», April 2019

Global Sustainable Investment Alliance SIX Swiss Exchange «Global Sustainable Investment Review», 2014, 2016 and 2018 «Key figures SIX Swiss Exchange: June 2018», July 2018

Global Trade Alert «Jaw Jaw not War War – Prioritising WTO Reform Options», June 2019

118 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 119 List of sources

State Secretariat for Economic Affairs (SECO) Swisscanto «Gross domestic product quarterly data», May 2018 «Schweizer Pensionskassenstudie 2018», May 2018 «Gross domestic product quarterly data, production approach», May 2019 «Die Lage auf dem Arbeitsmarkt», various editions Willis Towers Watson «Konjunkturprognose der Expertengruppe des Bundes», June 2019 «Global Pension Asset Study – 2018», February 2018 «Konjunkturtendenzen Sommer 2019», July 2019 Z / Yen Group Limited State Secretariat for International Finance (SIF) «The Global Financial Centres Index 23», March 2018 «Bericht des Bundesrates zum Prüfmechanismus zur Sicherstellung der standardkonformen Umsetzung des AIA 2018 / 2019», May 2019

Swiss Bankers Association (SBA) «SBA recommendation on the certification of wealth management client advisors», December 2017 «Switzerland – a strong hub for investment management», December 2018 «SBA guidelines on opening corporate accounts for blockchain companies», September 2018 «Cloud Guidelines – A guide to secure cloud banking», March 2019 «Market access for Swiss banks – Importance and outlook», SBA background paper, June 2019 «Does Switzerland need big banks? Banks in international comparison», SBA discussion paper, March 2019

Swiss National Bank (SNB) «Swiss National Bank sets criteria for fintech companies’ access to Swiss Interbank Clearing – Press release», January 2019 «Financial Stability Report 2019», June 2019 «Banks in Switzerland 2018», June 2019 «Annual Report 2018», March 2019 «Monetary policy assessment of 21 March 2019 – Press release», March 2019 «Online database», as at July 2019

Swiss Sustainable Finance «Swiss Sustainable Investment Market Study 2019», June 2019

120 Swiss Bankers Association | Banking Barometer 2019 Swiss Bankers Association | Banking Barometer 2019 121 Schweizerische Bankiervereinigung Aeschenplatz 7 [email protected] Association suisse des banquiers P.O. Box 4182 www.swissbanking.org Associazione Svizzera dei Banchieri CH-4002 Basel Swiss Bankers Association